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The challenges facing the asset management industry, including volatile markets, global regulatory reform and stakeholder demands for greater transparency, have been building for many years. Several of these changes, such as the implementation of new regulations, are accelerating and could make the remainder of 2012 a turning point for many companies, compelling them to take transformational steps to improve their competitiveness, according to a new PwC report, Top Issues Facing Asset Managers.

"Even as it enjoys a mild resurgence, the asset management industry is confronting challenging markets, regulatory initiatives, competition for clients and talent and new expectations from investors, regulators and other stakeholders. Under such circumstances, asset managers are trying to improve performance, rebuild profitability, manage risk and achieve the operational excellence that will drive future growth," said Barry Benjamin, PwC US and global leader, asset management. "Successful firms will adapt to industry changes and take advantage of the opportunities opening up in the global marketplace with products that meet investor needs, improve client service and enhance operations to address new regulations and stakeholder expectations."

The report identifies nine key challenges that PwC says the asset management industry currently faces and describes how leading managers are responding:

1. Addressing governance: Regulatory and stakeholder pressures are compelling asset managers to rethink governance, with greater involvement by executives and directors, especially audit committees. The U.S. Securities and Exchange Commission (SEC), in particular, is focused on how asset management fund boards are carrying out their duties, as well as the extent to which boards are responsible for problems that arise.

2. Navigating risk complexity: Asset managers are refining their risk management strategies and controls to place greater emphasis on emerging risks. Industry standards are developing, including steps to mitigate common risks as well as processes to identify, assess and report on enterprise risks.

3. Tackling new regulations: Rules issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other regulatory efforts will change many aspects of the asset management business – the advice firms provide, the way they trade securities, how they market themselves, the disclosures they provide and their employees' personal trading. Asset managers should consider taking a hard look at the effectiveness of their compliance programs.

4. Delivering cost-effective technology and operations: Many asset managers are investing in technology -- replacing aging systems, integrating legacy systems, moving some operations offshore and making use of evolving cloud computing technology.

5. Improving trust and transparency: Stakeholder scrutiny, together with new regulation, is driving demand for transparency. Investment managers are adapting to these expectations and finding that enhanced transparency can build trust with investors and consultants. As some processes and technology functions are shifted to third parties and offshore, managers are also seeking to improve security measures to protect confidential client information.

6. Maximizing value from M&A: Mergers and acquisitions have dropped significantly. Interested buyers, including U.S. and international asset managers and private equity firms, are largely on the sidelines. However, external factors could cause M&A activity to rise. Those trends include the requirement for some European banks to sell their money management arms and the need for private equity funds to deploy capital.

7. Pursuing growth: Asset managers are developing branding and the use of mobile technologies and social media to create growth opportunities. Using sophisticated analytics to understand customer preferences, firms are emphasizing client service and product development. One outcome is the creation of actively managed exchange traded funds awaiting SEC approval.

8. Meeting FATCA and other information reporting requirements: Investment managers are preparing to meet a January 2013 deadline for the Foreign Account Tax Compliance Act (FATCA) and comply with other mandates, such as the Report of Foreign Bank and Financial Accounts ("FBAR"). Beyond the business and tax risks, complying with FATCA and other cross-border regulations will require extensive, and potentially costly, modification of internal customer information and reporting systems.

9. Growing and leveraging human capital: Investment firms are competing hard for top-level talent. But the industry's chief human resource need is to develop compensation plans that reward long-term performance rather than immediate gains. Institutional investors are pushing managers to align their interests with those of their customers.