Retail investors represented more than 90% of the money management industry's net new flows in 2014 and will represent more than 100% in the future, while institutional assets will see outflows, said a new report by money management consulting firm Casey Quirk & Associates LLC.
The report, released Nov. 16, said the shift to individual investors is due to three key catalysts:
nIncreases in the number of people retiring — as baby boomers in developed markets enter retirement, they are withdrawing their accumulated savings from retirement plans;
nChanges in sovereign wealth fund dynamics: The post-financial crisis financial capital shifts that created sovereign wealth funds in emerging markets have stabilized, and the falling price of oil has shrunk petrodollar-driven investment pools; and
nInsourcing — the cost-benefit of third-party money management has become less obvious to large asset owners, many of which can hire their own portfolio managers and install systems to run passive products in-house.
Benjamin F. Phillips, a partner at Casey Quirk, said in an interview that 93% of money management industry net new flows in 2014 were from retail investors and 7% were from institutional investors. But going forward from 2015 to 2020, cumulatively, 119% of net new flows would come from retail investors while institutional outflows would amount to 19%, Mr. Phillips said.
As the defined benefit market has become smaller, sovereign wealth funds had been one of the few growing areas for money managers in search of institutional assets, Mr. Phillips said. But he said today that sovereign wealth funds in general have moved from the accumulation phase to the spending phase, building roads, school and other assets in developing countries.
The report said the best sources of organic growth for money managers in the institutional area in the near future will be managing portfolios for insurance companies and defined contribution plans. But it notes that managing those investments requires money managers to have a detailed regulatory compliance program and more detailed reporting programs.
The increasing attention to retail investors might also lead to a lower bottom line for some money managers the report said, adding that individual investor scalability is more fragmented, “eroding the industry's stability, a principal driver of favorable economics.”
While retail fees are higher than institutional fees; retail investors are more expensive to tap because they involve more complicated distribution, Mr. Phillips said.
The report said the money management industry is still highly profitable — money management firms saw an estimated 34% profit margin in 2014, up 2 percentage points from the previous year.
Mr. Phillips said the increasing focus on individual investors for money managers will also mean that firms with a strong brand presence will have a greater chance of success.
“A money manager can have a strong brand but crummy performance and still grow,” he said.
Mr. Phillips said the key to maintaining a strong brand name will be for the firm to have its portfolio managers appear on financial news programs, to release new products and to produce white papers that show the firm is a thought leader on investment.
“Buying billboards is not going to do it,” he said. n