The persistently weak economy and new regulations are preventing investment management firms from growing, according to a survey of 100 executives by KPMG.
Seventy percent said they are concerned about the overall regulatory environment in the U.S., and 61% said new regulations are their biggest worry.
Just over half are hoping the U.S. economy will improve moderately in 2012, but 57% do not expect a full recovery in the U.S. economy until 2013 or later.
“The executives told us that the combined impact of the uncertain regulatory and constricted economic environment is significantly inhibiting growth as they try to determine what moves they will need to make to maintain their competitive edge,” said Dave Seymour, head of KPMG’s investment management practice.
“The good news is that they are putting cash into play to improve their infrastructure and to prepare for future business needs,” Seymour added.
The executives plan to increase capital spending the most on information technology (57%), followed by regulatory and internal control needs (29%) and new products and services (26%).
Asked what areas of improvement were needed to comply with new regulations, 63% said improving existing internal policies and procedures, 63% said strengthening IT platforms and applications, 59% pointed to risk management, 46% said better staff training, and 40% said enhancing financial reporting procedures.
Seventy-five percent said their firms have “significant” cash on their balance sheets, and 24% are investing that cash. Another 27% said their firms plan to put that money into action by the first quarter of 2012. Asked what their firms will use that money for, the top three reasons were technology (25%), acquisitions (21%) and expansion into new markets (18%).
“Information technology is among the most important areas for these executives right now because system platform upgrades will be required for many firms to maintain their competitive advantages, in addition to meeting new regulatory requirements, such as cost basis reporting, the Foreign Account Tax Compliance Act and certain components of Dodd-Frank,” Seymour said.
Sixty-one percent of the executives also plan to increase headcount over the next year. Twenty-nine percent expect the headcount to remain the same; only 11% foresee a decrease in employees.
Asked about dealings with their investors since the financial crisis, 49% believe it has improved, 37% said they have not seen any real change, and 15% said it is still too early to tell.
Fifty-four percent said transparency between investment managers and investors has improved, while 38% said there hasn’t really been any change, and 9% said it is too early to tell.
“The current market turmoil reminds us again that rebuilding trust with investors is a critical step to seeing a full recovery in the industry,” Seymour noted.
The survey also showed that 46% expect investors to return to traditional, long-only funds in the next 12 months, 15% cited real estate, 14% pointed to private equity funds, 14% said hedge funds and 11% said venture capital.