Asset management firms generated higher levels of profits in 2004 than in any of the previous three years, according to a new survey from strategic consulting firm McKinsey & Co. Profit levels have been "remarkably" consistent over the four-year period — ranging from a low of 25% in 2002 to a high of 28% last year — but maintaining that stability will become increasingly difficult. Also, growth in the asset management industry slowed over the last year, and net new flows increased by only 2%, according to the report.
These trends indicate that the industry "is making a fundamental bet that market appreciation, not new flow growth, will drive future profitability; if that appreciation doesn't materialize, it is unlikely that significant profit growth will materialize, given today's rate of new flow growth," according to the report.
In addition, asset managers are facing more pressures to lower the pricing on both institutional and retail products, and revenues from fees have decreased over the last year as well, the report said. And the productivity of asset management firms — measured by assets under management per employee — has gradually slowed over the last few years. While assets have grown over the last four years, assets under management per employee has decreased by 4%.