The bank and non-bank asset management industry is struggling with fee compression which has sparked a series of layoffs that you may have read about in recent news. If history repeats, these institutions will be going through a period of introspection while making hundreds of business decisions to ultimately boost their bottom line. Bank regulators have been watching the effects of fee compression closely since the 2008 financial crisis and the long period of low interest rates that followed. What they observed and criticized were business changes ahead of proper risk management. This post summarizes some of the issues identified by bank regulators and hopefully serves as a lesson or reminder for asset managers dealing with tightening margins.
This is a common way to boost the bottom line as evidenced by the recent layoffs. Regulators take issue with cost cutting to the extent that it impacts the effectiveness of key operations or risk management. For example, layoffs in an operations department that result in control gaps or deficiencies would be criticized. In addition, if the workload for employees increases to unreasonable levels and leads to operating losses or customer complaints, this would also attract criticism.
New Products or Services
Banks that rush to launch new products and services to boost their bottom line without considering all the strategic, reputational, operational, and compliance risks associated with the change put themselves in a difficult position. Significant changes should include all relevant stakeholders including but not limited to risk, compliance, audit, information technology, legal, operations, and more. This provides the business unit some cover if an issue arises, and ensures that all applicable risks are considered and mitigated before implementation.
Conflicts of Interest
An uptick in conflicts of interest in recent years resulted in it becoming a focus area for bank regulators in 2019. Fiduciaries have at their disposal many opportunities to benefit from their clients' assets. These opportunities can include referral arrangements, shareholder service fees, soft dollars, affiliate transactions, and more. Institutions that engage in activities where its interest conflict with its clients' without considering the risks involved should expect criticism from regulators.
How ACA Can Help
ACA's Banking Asset Management Group assists clients with the risks outlined in this post along with other challenges that firms facing compressed fee schedules are dealing with. Additionally, ACA provides outsourced compliance services, staffing support, financial technology, and regulatory technology that can help organizations and divisions operate more efficiently and effectively.
For More Information
If you have questions or would like to learn more, please contact Roy Kim at firstname.lastname@example.org.
About the Author
Roy Kim joined ACA’s Diversified Financial Services practice in 2018 as the Director of Banking Asset Management. Prior to ACA, Roy served in the Office of the Comptroller of the Currency as Examiner-in-Charge and Functional Examiner-in-Charge for a portfolio of trust banks and divisions. Specifically, he developed and led the execution of supervisory strategies for his portfolio and assisted other examiners with similar activities. In addition, Roy led the development of regulatory technology at the OCC to enable examiners to supervise fiduciary activities more efficiently and effectively.
In his career, Roy has also worked as part of the first, second, and third lines of defense as a risk, compliance, and audit leader. In this capacity, Roy helped organizations within the asset-management industry identify, assess, mitigate, and monitor risk by, among other things, applying his programming skills and building tools to automate risk and control monitoring and validation. Roy earned his Bachelor of Science degree in Finance from the University of Maryland at College Park. Roy is a Certified Fiduciary and Investment Risk Specialist (CFIRS), and Certified Internal Auditor (CIA). Roy also earned the Certification in Risk Management Assurance (CRMA).