The Digital Transformation of Asset & Wealth Management

The Digital Transformation
of Asset and Wealth
Management

2
Contents
The Asset and Wealth Management Business Model—Under Siege .............................................4
Executive Summary—Five Key Challenges Facing Asset and Wealth Management Firms.....5
Impact of Poor Performance—Quant Goes Mainstream .................................................................6
Investor Preference for Passive Strategies and ETFs.........................................................................7
Pressure on Trading, Technology and Operations .............................................................................8
Rise of Robo-Advisory ...............................................................................................................................9
Regulatory and Compliance Requirements.........................................................................................10
What’s Next for Asset and Wealth Managers .....................................................................................11

3
PAUL TUDOR JONES CALLS ON QUANTS TO REVAMP FIRM HURT BY LOSSES
"Jones, suffering losses and about $700 million in investor withdrawals in the second
quarter, has accelerated a high-tech revamp at Tudor Investment Corp"
Bloomberg – August 3, 2016
REGULATOR CALLS FOR GREATER ASSET MGMT OPS OVERSIGHT
"The Financial Stability Board (FSB), a global regulatory body, has proposed
a set of policy guidelines including recommendations targeting firms
based on size" FundFire – July 12, 2016
ACTIVE MANAGERS FACE DIRE MULTI-ASSET, PASSIVE ONSLAUGHT
"Multi-asset and passive products will soon account for 93% of total net
inflows" FundFire – July 13, 2016
ASSET MANAGEMENT: ACTIVELY FAILING
"As investors pour into index funds, asset managers are seeking new
strategies to keep them on side"
Financial Times – July 17, 2016
HEDGE FUNDS’ TECH METAMORPHOSIS SEEN IN CITADEL’S
MICROSOFT HIRE
"Silicon Valley watch out. The finance industry is coming after your top
managers" Bloomberg – July 7, 2016
HEDGE FUND ROBOT OUTSMARTS HUMAN MASTER AS
AI PASSES BREXIT TEST
"By luck or design, Nomura’s Simplex Equity Futures Strategy Fund ended
the [Brexit referendum] day with a 3.4 percent gain, one of its best results
in three months of trading." Bloomberg – August 21, 2016

4
The Asset and Wealth Management Business Model—
Under Siege
The asset management industry is under siege. A
near-perfect storm of poor investment performance,
mutual fund outflows, investor preferences
for passive, low-fee strategies, and an onerous
regulatory environment have led to a fundamental
shift in the asset management business model. From
the largest traditional asset managers to the smallest
alternative and wealth management firms, assets
under management have been contracting and/or
moving into lower-margin products, forcing these
firms to reassess their revenue, growth and profit
potential going forward. As recently reported by
the Financial Times, “Profits for asset management
companies are set to fall by a third over the next
three years, with analysts highlighting the rise of
passive investing and volatile markets as the biggest
threats to active managers. Between 30-35% of the
profits earned by investment managers globally
could be ‘wiped out’ by 2018, unless more radical
steps are taken to cut costs.”
The traditional asset management business
model has withstood the test of time, persevering
through multiple market cycles and across shifting
geopolitical landscapes. Riding a 30-year wave
of steadily rising equity prices and falling interest
rates, this model delivered stable management
and performance fees, healthy profits, and rising
assets under management (AUM). As a result, asset
management firms felt comfortable and confident
investing in their businesses, expanding their
infrastructure to meet the demands of a growing
investor base. However, the new realities of the
marketplace are presenting significant challenges to
firms across the industry.
Source: CapitalIQ. Measures EBITDA per dollar of AUM for 33 global
asset managers with an aggregate $13.4 trillion in assets under
management in 2015.
Source: BlackRock.
Expected organic growth 2016 – 2020
Digital/robo advice
ETFs
Factors and smart beta
Bundled multi-asset
Alternatives
Non-ETF index
Asset management industry
Active fixed income
Active equity
62%
12%
11%
4%
3%
2%
2%
1%
0%
Public asset manager profitability
Bps of EBITDA per $ AUM
2010 2011 2012 2013 2014 2015
18.4 18.5
18.7
18.1
18.3
16.3

5
Executive Summary—
Five Key Challenges Facing Asset and Wealth
Management Firms
1
2
3
4
5
As active portfolio management and
mutual fund products continue to
underperform, both traditional and
alternative asset managers need
to expand their suite of products to
include more quantitative investment
strategies, which have outperformed
and are attracting material inflows.
Senior executives of asset
management firms need to look
beyond their traditional products
and strategically embrace passive
strategies, such as smart-beta
exchange traded funds (ETFs). To
retain or grow assets in the current
environment, they will also need to
create products that offer a more
customized, solutions oriented and
multi-asset approach.
Today’s head of trading needs to
be globally minded, technology-
oriented and fully committed to
breaking down the barriers between
siloed trading teams. By embracing
electronification, they will be able
to streamline these teams onto one
universal technology platform, greatly
improving execution, communication
and the value added to the investment
process, all while reducing headcount
and costs.
Today’s younger and more digitally
oriented investing demographic is
focused as much on fees as they are
on performance. As a result, they will
increasingly turn to robo-advisory
platforms. Wealth management
firms will need to embrace this
technology if they want to court this
emerging investor base.
The new breed of successful
compliance officer will aggressively
leverage cutting-edge technology
and data applications. The only way
to ensure confident delivery of the
required level of information will be to
have highly accurate, enterprise-wide
internal reporting systems that can
capably assess the firm’s compliance
with regulatory requirements.
Poor investment performance
Pressure on trading, technology
and operations
Regulatory and compliance
requirements
Investor preference for passive
strategies and ETFs
Rise of robo-advisory

6
While institutional investors have generally been
fleeing hedge funds, they are increasing their
allocations to systematic/quantitative strategies.
Simultaneously, after seeing large outflows from
2008 – 2013, quant funds have become more
transparent and have added more low-fee and mutual
fund products to attract AUM. Institutional inflows
to quant funds reached over $7 billion in the first
quarter of 2016, and these funds were among the best
performers during the recent Brexit-driven market
gyrations. Bloomberg reported that Brevan Howard
Asset Management used artificial intelligence (AI) to
mine social media in advance of the vote.
Traditional analytics are being transformed by
advanced digital technologies such as machine
learning, artificial intelligence and predictive
reasoning. These technologies, along with new
quantitative techniques, are able to provide a
competitive portfolio management advantage for
those who are able to implement them. This evolution
will continue and intensify going forward, as will
investor demand for quantitative products.
Impact of Poor Performance—
Quant Goes Mainstream
Recent market events
August 9, 2016 – Wells Fargo acquired Analytic
Investors, an institutional quant firm with $15 bn
in AUM.
June 29, 2016 – GAM acquired Cantab Capital
Partners in order to build out a new quantitative
investing unit, GAM Systematic.
April 19, 2016 – Fundamental asset manager
T. Rowe Price launched three new quantitative
equity funds.
Feb 27, 2015 – Bloomberg reported that Bridgewater
is building an AI unit reporting to IBM alumnus
David Ferrucci.
New roles What competencies are needed
Quant/systematic portfolio
managers/analysts
Strong engineering/technical skills adapted
to a market context
Artificial intelligence developers
Coding/programming ability with AI and
machine-learning expertise
Distribution professionals able
to represent quant products
The ability to credibly articulate increasingly
sophisticated quant and systematic strategies
to investors
Institutional flows into active quant strategies
USD (billions)
2011 2012 2013 2014 2015 2016
Q1
Source: eVestment.
-$43
-$17
-$24
$23
$5 $7

7
Head of ETFs
Head of passive strategies
Head of multi-asset
The ability to design, implement and manage
more solutions oriented products and
strategies
Head of ETF distribution
Deep relationships with sophisticated
institutional investors, combined with strong
technology and/or product expertise
Head of digital product development
A combination of strong technical and
product design skills with investor
connectivity
Investor Preference for Passive Strategies and ETFs
There has been a massive shift of assets away from traditional, actively managed funds into passive strategies
and ETFs. In the first quarter of 2016, worldwide institutional asset managers saw net outflows of $95.4 billion,
according to eVestment. These outflows came on the back of a further $137 billion in outflows during Q4
2015. Equity strategies alone reported $58.6 billion of net outflows in the first quarter, their 12th consecutive
quarter of redemptions. The bulk of these equity outflows came in actively managed portfolios, which lost
$70.5 billion, while passive equity strategies, in contrast, attracted net inflows of $11.9 billion. This trend is
reflected in investor opinion as well as fund flows: a BlackRock survey found that 60% of Millennial and 40% of
Gen X investors believe the market will outperform active fund managers, compared to 30% of Baby Boomers.
Traditional asset management firms who have shunned ETFs for a variety of reasons, including the desire to
safeguard their proprietary active-management investment processes, are at risk of being left behind. The new
realities of the marketplace demand lower fees and greater liquidity, and asset managers will have to adapt by
adding passive strategies into their suite of products.
2010 2011 2012 2013 2014 2015 2016 Q1
Institutional flow into active and passive funds
USD (billions)
-$140
-$69
$132
-$67
-$244
-$500
-$120
$184 $166
$87 $108 $82 $83
$25
Active Passive
Source: eVestment.

8
Head of trading/electronic trading
The ability to lead large global teams; strong
risk-management and execution background;
technology orientation
Head of trading technology
integration
The capacity to transform outdated and siloed
infrastructure, embracing electronification and
deciding whether to “build or buy”
Head of derivative trading/
clearing/operations
Product fluency in derivatives across asset
classes and geographies, combined with a
strong operations background
The most significant technological trend in
global markets of late has been the increasing
electronification of trading across multiple asset
classes. Most asset and wealth management firms
have multiple trading platforms for different products,
channels and currencies – an expensive, inefficient
and outdated execution model these firms can no
longer afford. With electronification having already
conquered the equity, commodities and foreign
exchange markets, the next trading domino to fall will
be fixed income, which has stubbornly clung to its
outdated voice-execution model. JP Morgan Chase's
recently announced partnership with Virtu Financial
to use their technology in the dealer-to-dealer US
treasury market is indicative of the future of trading.
Within the next decade, it seems inevitable that
electronic execution will be the standard across all
major global asset classes.
Gary Cohn, the President and COO of Goldman
Sachs, was recently quoted at the Deutsche Bank
Global Financial Services Investor Conference as
saying, “In addition to capitalizing on disruption in
the competitive landscape, we continue to embrace
technologically-driven market disruption … there has
been a tremendous rise in electronification in the
financial markets over the last two decades … We
invested in technology in response to feedback from
our clients and adapted early to the electronic market
in Equities … We aim to provide these clients better
execution and lower transaction costs.”
The challenges facing trading, technology and
operations demand a new breed of technology savvy
trading leadership for asset management firms.
Pressure on Trading, Technology and Operations
Notable Moves
Citadel has been at the forefront of recruiting new
talent to build its IT capabilities. In Q2 2016, they
made a number of substantial executive hires,
bringing in Microsoft’s COO, Kevin Turner, as the
Chief Executive Officer of its Citadel Securities
unit, and Morgan Stanley’s CIO Steven Lieblich
as the Chief Technology Officer of its hedge fund
business.
Other notable moves include Bank of America’s
hiring of Pankil Patel from Credit Suisse to lead
electronic trading services in the Americas,
Bridgewater Associates’ hiring of Jon Rubinstein
from Hewlett Packard to serve as its co-CEO and
Point72’s hiring of Timothy Shaughnessy from IBM
to be its Chief Operating Officer.

9
Head of robo-advisory platform
architecture and integration
Strategically minded digital leader to
build/buy/integrate the robo platform
Head of client experience Digital CMO experience
Digitally savvy wealth advisors
Connectivity with the next generation of
investors
The robo-advisory industry continues to see rapid
growth, focused primarily on the mass-affluent market
segment. Robo-advisors have built up over $200 billion
in AUM over a relatively short period of time and are
projected to increase to $2.2 trillion over the next five
years.
As PwC wrote in its January 2016 “US Asset and
Wealth Management M&A Insights,” “Due to their
robust technology platforms and low human
involvement, the robo-advisors are able to provide
high end wealth management advice at a low fee to
their price-sensitive customer base.” PwC also stated
that, “Morgan Stanley, Bank of America Merrill Lynch,
Wells Fargo and Deutsche Bank have all recently
publicly stated an intention to significantly invest in
developing or acquiring digital advisory capabilities”
and noted, “While it is unlikely that robo-advisors will
completely replace their human counterparts, the
optimal model will combine a robust digital experience
with the ability to interact with a human advisor.”
Robo-advisors are here to stay, and wealth
management platforms will need to adapt to this new
reality to remain relevant. A BlackRock survey revealed
that 58% of Millennials are interested in using a robo-
advisor platform. If wealth managers can establish
digital relationships with this emerging demographic
of potential clients, they can then introduce more
traditional products to achieve a greater share of
wallet. Despite being digitally disruptive, robo-advisors
will enhance, not replace, the wealth advisor.
Rise of Robo-Advisory
Forecast—Robo-advisor AUM
USD (trillions)
2016E 2017E 2018E 2019E 2020E
$0.3
$0.5
$0.9
$1.5
$2.2
Source: KPMG.

10
The current regulatory environment, which has
consumed the attention of the banks for the past
several years, is now asserting itself on the buy-side.
To meet the new wave of regulatory requirements,
asset and wealth management firms will have to invest
significantly in their legal and compliance capabilities,
which will be a further drain on profitability.
There is little room for error, as the ability to deliver a
credible risk-governance model to the regulators has
never been more important. Accurately measuring,
monitoring and managing credit, counterparty
and liquidity risks have become enterprise-wide
imperatives, not only because of greater regulatory
scrutiny, but also because of the overwhelming
financial implications of non-compliance, which can
threaten the very survival of an asset management
firm.
The traditional path for compliance officers within
asset management firms has been almost exclusively
through the legal and compliance silo. In our analysis
of the background of incumbent CCOs at global
asset managers, we found that 68% have risen to
their current roles from a purely asset management
compliance background. For firms to build systems
and processes in a way that is mindful of new market
realities and regulatory demands, they will need to
employ compliance officers who are digitally savvy
and technology-oriented.
Backgrounds of current CCOs at global asset
managers reflect a lack of career diversity
Regulatory and Compliance Requirements
Recent comments by executives
“Upward pressure on regulatory and compliance
cost is expected to continue throughout 2016.”
Michael Bell, CFO, State Street, Q1 2016 earnings call
“Regulation is increasing at an almost exponential
pace. This adds significantly to the complexity
in compliance requirements for asset managers.”
Joseph Sullivan , CEO, Legg Mason, Fiscal Q3 2016
earnings call
Technology-oriented compliance
officer
Legal/compliance experience combined with a
business-oriented and tech-savvy approach
Head of compliance/platform
design/integration
Technology leadership with a background in
enterprise risk management
Compliance (asset management)
Legal (asset management)
Regulator
Legal (law firm)
Consulting/big 4 accounting
Audit
Compliance (commercial banking)
Compliance (investment banking)
Risk
68%
41%
38%
24%
9%
6%
6%
6%
6%
Source: Russell Reynolds Associates.

11
What’s Next for Asset and Wealth Managers
The asset and wealth manager of 2020 will be vastly different from those of today.
Delivering smart beta and low-fee alpha to investors via algorithmic, quantitative
and artificial-intelligence based strategies
Providing multi-asset solutions and incorporating a mix of active, factor-based and
passive strategies in bespoke portfolios
Offering integrated and technologically advanced trading platforms across multiple
products and currencies, seamlessly linked with clearing and operations
Able to transform a highly-efficient trading tech & ops platform into a profit center
Offering mobile-enabled products that gather substantial assets from Millennial
investors
Robo-advisory integrated with financial advisors to deliver a seamless coverage
model
Providing a best-in-class user experience and the ability to scale without large
sales networks
Possessing enterprise-wide reporting driven by a seamless technology
infrastructure encompassing all dimensions of risk and governance
Product teams working in partnership with compliance to develop new products
and distribution strategies
2016 challenges What the winners look like in 2020
Passive strategies
and ETFs
Poor investment
performance
Trading, technology
and operations
Robo-advisory
Regulatory and
compliance

12
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Americas
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St. Paul
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Russell Reynolds Associates is a global leader in assessment, recruitment and succession planning for boards of directors,
chief executive officers and key roles within the C-suite. With more than 370 consultants in 46 offices around the world, we
work closely with public, private and nonprofit organizations across all industries and regions. We help our clients build teams
of transformational leaders who can meet today’s challenges and anticipate the digital, economic, environmental and political
trends that are reshaping the global business environment. Find out more at www.russellreynolds.com. Follow us on Twitter:
@RRAonLeadership.
Authors
Kurt Harrison leads the firm’s Global Asset & Wealth
Management practice. He is based in New York.
Eric Girma is the firm’s Global Knowledge Leader for
Financial Services. He is based in London.

13
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