The North American asset management industry is on the brink of a once-in-a-generation shift in competitive dynamics, said a report from management consulting firm McKinsey & Co.
The report, “Thriving in the New Abnormal — North American Asset Management,” said this shift is due to five converging trends: the end of exceptional investment returns; a shakeup in active management; more assets flowing into alternatives; an increased adoption of digital technology; and heightened regulation.
“This isn't simply a shift in the economic cycle. This is a fundamental shift in the very foundation on which the industry is built,” said Ju-Hon Kwek, a partner at McKinsey & Co. and co-author of the report, in a phone interview. “The very basis for competition is changing.”
The first major trend is the end of 30 years of exceptional investment returns and expectations of continued high returns. The result will be a decline in average returns for equities of 150 to 400 basis points and of 300 to 500 basis points for fixed-income assets. This will provide opportunities for money managers to help their clients with superior returns and new investment offerings, the report said.
As clients re-examine their investment needs and relationships with managers, McKinsey expects that up to $8 trillion of active assets will be up for grabs over the next several years. So, for the next decade, low-cost passive managers, high-conviction fundamental managers and firms that can generate alpha will aggressively compete for this capital, Mr. Kwek said.
The decline in average returns will also spur a boost in the steady stream of assets moving into alternative investments. McKinsey expects that these flows will be redirected heavily toward illiquid private markets as investors seek alpha in less efficient segments of the market.
The report also argues that the money management industry is approaching “a true digital revolution that incorporates advances in data and analytics” to become a driving force for radical improvements in portfolio management, capital markets activities, and the back and middle office.
“The asset management industry is a half a generation behind when it comes to technology. But we think that's going to change,” Mr. Kwek said.
Finally, the asset management industry is entering a period of heightened regulation that will force asset managers to reframe their distribution relationships and retool their products. The Department of Labor fiduciary rule that goes into effect in April 2017, for example, will accelerate several current trends in asset management, including the demand for passive strategies and exchange-traded funds, the growth of digital advice and a culling of asset management partners by wealth managers, according to the report.
“Managers need to start thinking about costs in a fundamental way,” Mr. Kwek added. “Not just tightening one's belt (but) a retooling of their business model if the industry is to retain its profitability.”
Overall, 2015 was a strong year for North American asset management. According to McKinsey, year-end assets under management hit an all-time high of $68.6 trillion.
