NEW YORK — The ongoing reforms in asset management will set the tone of the business over the next few years, predicts Ernst & Young LLP in its annual report on the state of the financial services industry.
"Both registered funds and hedge funds will deal with increasing regulation over the next two years," said Dan Oakley, director of thought leadership for E&Y's financial services practice. He worked on the report with Steven Buller, E&Y's global and Americas director of asset management services.
Mr. Oakley added that the reform agenda will prompt improvements in governance and reporting. "There will also be changes in the distribution mechanisms that will differ from the current platforms. That, in turn, will result in different information, different types of compliance and different opportunities to make money," he said.
The asset management business remains be healthy, with $6.5 trillion in assets, managed by 630 fund managers, according to the report.
The average gross margin of large public advisers is around 37%. Going forward, margins are likely to be affected by new administrative costs such as managing internal controls and verifying documentation practices, as fund firms increase compliance measures to prevent future trading scandals, Mr. Oakley said.
Redemptions for the average equity fund fell to around 23% in 2003, because of good market returns, compared with 31% the previous year. However, a significant change in the industry's growth prospects looms. During the next decade, the asset growth rate is expected to drop to between 3% to 5%, from a growth rate of 10% to 15% in the '90s. The reversal is partially a reaction to market volatility and investor hesitancy. But also, the mutual fund business is approaching saturation, which is reflected in a decline in the number of funds, the number of classes within funds and funds' ability to penetrate distribution channels, according to the report.