Industry leaders at NICSA's strategic leadership forum in Hollywood, Fla., reached quick consensus on the twin challenges at the top of every organization's strategic priority list: managing cybersecurity threats and responding to increased regulatory demands.
But many noted that due to cost and technology requirements, both issues were proving to be difficult to handle, even for the most well-resourced asset management firm.
"Cybersecurity has replaced regulatory change as the leading challenge for operations professionals," said NICSA president Theresa Hamacher.
"There's not a single company that this issue isn't within their top three concerns," said Peter Poulin, head of Deloitte's investment management advisory practice. "What we are seeing in financial services is that firms seem to be more spending a lot more money on cybersecurity, and there is an urgency to it.
"But attacks keep on coming, with more frequency," he added. "I'm still waiting for the big one to happen to someone in this room. You can't spend enough money on this stuff unfortunately."
The spate of cyberattacks are heralding a much larger conflict, said James Glassman, executive director, George W. Bush Institute, and former Under Secretary of State for Public Diplomacy and Public Affairs.
"We're right now in a period of phony cyberwar, but it's very clear that the tools are there for a great deal of destruction," Glassman said. "Our defenses are not very good, and everyone knows something about to happen, though not quite yet."
Poulin predicted that the parties suspected to be behind recent cyberattacks on various U.S. financial firms - particularly nation-states and ideological groups - would focus on money managers and custodians.
"What's more American than investment management?" he asked. "There's no reason to think why they won't be coming after us pretty soon."
'PRUDENT RISK'
Not all industry concerns are concentrated on nefarious electronic activities of foreign adversaries.
Washington is also a source of much frustration, attendees said, with the proposal to determine whether asset managers should be designated as "systemically important," a regulatory classification that would entail bank-like oversight by the Federal Reserve, drawing particular scorn.
"I share the concern that we should not regulate every financial institution like a bank," said former SEC chairwoman Mary Schapiro, who was the forum's keynote speaker. "Capital markets are all about risk taking - hopefully informed, prudent risk taking. To limit that would be terrible for our economy."
To date, the Financial Security Oversight Commission, a consortium of financial regulators formed by the Dodd-Frank Act, has only designated MetLife, AIG, General Electric Capital and Prudential Financial as nonbank systemically important financial institutions, or SIFIs.
There is an opportunity to push back against the process and challenge how the commission thinks about risk, she said.
A reason why FSOC would consider adding asset managers to SIFI designations is that in the makeup of the commission, she said, "the dominant voice around table is clearly bank regulators.
"A better approach would've been to regionalize the regulatory structure," Schapiro said. "We still have four bank regulators and two capital market regulators. It is what it is. This is the best mechanism that we have."
Schapiro added that a leaked White House memo supporting a fiduciary definition for brokers selling retirement investments proposed by the Department of Labor was "pretty shocking,"
She said it is difficult to understand how the proposal will ultimately be received by the SEC, as it has its supporters and detractors within the commission. "The issue is politically difficult within the SEC," she said.
Schapiro said the goal in helping investors gain a better understanding of their investment options was valid. "We have to make things easier for investors one way or another," she said, but predicted more debate before any resolution on the fiduciary standard matter.
"It's completely unclear where it will go, but it will continue to be a fight," she said.
REGULATION FRUSTRATION
Another issue with regulators attendees said is the heavy burden placed on firms to maintain compliance, particularly regarding data management.
"We commit a lot of resources to be in compliance," said Michael Roland, managing director and chief operating officer at Voya Investment Management, who added there was increased pressure on management and boards to oversee service providers.
"Ten years ago this stuff was taken for granted," Roland said. "Every so often, you'd visit the transfer agent, kicked the tires. Now regulations require due diligence of the transfer agent, the broker-dealers processing transactions - as a result people at the management level are devoting time to due diligence visits."
The costs of protecting against cyberthreats and maintaining compliance will eventually get passed off onto clients, said Dan Houlihan, senior vice president at Northern Trust and head of global fund services, North America.
One of the effects of these increased costs is that it has cut into innovation budgets, he said. "Something has to give. Regulation is not an option. You have to do it. It has definitely had an impact on what we've been able to do in the last five years.
"The percentage of capital going to regulation is astonishing," Houlihan added. "We're getting hit from a number of different angles. We've got to figure out how to turn that into net income."
TECH CHALLENGES
Some attendees explored the ongoing concern of the impact of technological disruption on the industry. But many said that innovations could be managed with a long-term plan for adoption.
"Technology is a threat only if you ignore technology," said Barry Benjamin, partner and asset management practice leader at PricewaterhouseCoopers.
NICSA's Hamacher said conference speakers and attendees were focused on how they could efficiently and effectively support new products and marketing efforts. "A hot topic was the growing use of technology to provide financial advice and how that will affect fund operations," she said.
Lawrence Hughes, CEO of BNY Mellon Wealth Management, said he constantly reminds employees not to underestimate tech upstarts. "We certainly have built-in advantages but we need to be investing in technology and ideas that are as good or better than robo advisors."
