The asset-management business will have to deal with some major challenges over the next few years as competition increases, regulations tighten and clients demand more from their financial advi-sors, suggests a recently released report from PricewaterhouseCoopers LLP.

Although the future holds serious threats that no financial services firm can ignore, there are many opportunities for agile companies to gain a competitive advantage, says the report, written by Raj Kothari, a partner with PwC and the firm’s national asset-management practice leader in Toronto: “This is a time when all organizations should be thinking about these impacts and developing new strategies for their operations. Everybody should develop new strategies.”

In particular, asset managers remain under considerable pressure, which has been made worse by the continuing uncertainty in the markets, says the PwC report, which is entitled Top 10 issues facing the Canadian asset-management industry.

For instance, companies are cutting their fees to stimulate demand in a balky market. At the same time, asset managers must bear the cost of new, tighter regulations and a clientele that is demanding a better range of products with more transparency.

To reduce costs, companies are outsourcing their non-core operations to third-party providers, including their transfer agencies and fund and trust accounting operations.

Asset-management firms are also sharing the costs of their human resources and information-technology services.

But these cost-cutting measures could hinder the ability of companies to adapt, the PwC report warns, referring to the high cost of the technology needed to keep front-line staff efficient and firms at the leading edge. Thus, it’s critical for companies to remain flexible — despite tight budgets — so they remain ahead of coming changes.

This is especially true because asset managers will face increased competition from foreign institutions and Canadian banks, says the PwC report, which anticipates that small and medium-sized players will consolidate so they can achieve the economies of scale that they need to compete effectively against the industry giants.

Such consolidation will also help smaller companies handle the complex regulations that are coming, with their higher costs of compliance.

However, if Canadian asset-management companies want “real growth on a large scale,” they should look overseas, the report says, noting the rapid growth of wealth in Asia, the Middle East and the “BRIC” countries of Brazil, Russia, India and China.

Some Canadian asset-management companies are leading the way, the report adds, pointing to four that are expanding in India: Fidelity Investments Canada ULCand Franklin Templeton Investments Corp., which are directly involved in that country; while Bank of Montreal and Sun Life Financial Inc. have joint ventures. (All four firms are based in Toronto.)@page_break@Canadian asset managers have many ways to protect their businesses against coming threats, but the PwC report says repeatedly that it’s vital to work closely with clients if they are to succeed in the difficult period ahead. In fact, the report cites another recent PwC survey that found that increased client contact is the best way to retain clients. Moreover, the Top 10 issues report adds: “Failure to understand client needs today is likely to result in a loss of market share tomorrow.”

The key to solid relationships with clients is excellent advice and a good distribution channel, the report says. These factors are increasingly important because clients are demanding more from their advisors at a time when the products they are being offered are becoming more complex.

As the report explains: “To succeed, [asset managers] will not only need to develop a robust distribution system, but focus on delivering knowledgeable, quality advice.”

PwC’s studies show that the advice component will become increasingly important in the future. And to succeed in this market, asset-management firms will need state-of-the-art communications to keep clients fully informed and onside, adds the report: “That could prove costly for a number of smaller asset managers.”

The report’s suggestions have garnered support from many experts in the asset-management industry. In particular, Dan Hallett, director of asset management with Oakville, Ont.-based HighView Financial Group, says that advice is the key to growth in the asset-management business because clients are coming through a bear market and they are nervous about the future and their investments. Thus, clients want clarity in the products they are offered, and they are demanding their money’s worth from their advisors.

“It’s a tough time to be an advi-sor,” he notes. “Advisors have to work harder to hang onto their business.”

Norman Raschkowan, chief investment officer with Mackenzie Financial Corp. in Toronto, agrees that the key to a successful, growing asset-management business is to work closely with clients, to find out exactly what they need and then to provide them with a tailored solution.

“Many people need help because the decisions they are being asked to make are more and more complex,” he says. “And the more complex the decision, the more likely [clients] are to keep the status quo.”

Much like the PwC report, Rasch-kowan says the solution is to offer a wide range of products that serve the best interests of clients. The products must be simple to understand and must serve clients well.

Good, understandable products are especially important to Mackenzie Financial, he adds, because it uses an independent sales force. And each product must compete with the offerings of other companies.

Brian Murdock, chairman and CEO with Toronto-based TD Asset Management Inc., also believes that the secret to success in the years ahead is to offer a wide range of products through a distribution network that includes retail bank branches, high-wealth individuals, institutions and corporate clients.

Scale is critical because it gives TDAM the depth to offer a wide range of products through multiple channels, he says: “Basically, we pay for [a product] once and have the opportunity to distribute everywhere.” IE