Fee pressure and slow growth will force global asset managers to cut costs and transform their business strategies to survive, said a new white paper from money management consulting firm Casey Quirk by Deloitte.
In “Survival of the Fittest: Defining Future Leaders in Asset Management,” Casey Quirk outlines how money managers must change to compete in a new age. Some of the defining characteristics in the marketplace now are lower capital market returns, shrinking growth in assets to manage and widespread portfolio derisking.
Increasing government regulation of investment advice providers and disruptive technologies that circumvent traditional asset managers also pose long-term challenges. the white paper said.
Organic growth has already slowed from an average rate of 3.5% annually worldwide before the 2008-2009 financial crisis to 1.7% from 2009 to 2014. Growth likely will fall below 1% in the near future. China's asset management marketplace is an exception and will grow as fast as the rest of the world combined, according to the analysis.
“The AUM in the institutional money management industry is continuing to shrink,” said Benjamin F. Phillips, a principal and investment management lead strategist at Casey Quirk, in a phone interview. “The institutional marketplace is starting to shrink because pension plans are paying (more to) pensioners and sovereign wealth funds are giving (more of) their money to their governments” than they take in.
Additionally, expected lower returns from capital markets will create pressure on asset management fees and profits. Near-zero interest rates and the end of a secular surge in growth worldwide could slice future capital markets returns in half.
Money managers and advisers will need to slash fees to maintain the same long-term ratio of fees to returns, which historically has hovered around 25%. Casey Quirk predicts median profit margins for asset managers will drop to 28% from 34% in five years.
“This doesn't mean there aren't a lot of bright spots,” Mr. Phillips added.
For one thing, the defined contribution industry is going to continue to grow. For another, the discussion over outcome-oriented or multiasset portfolios is continuing.
“That's one of the biggest areas of growth,” Mr. Phillips said about multiasset-class investing.
According to Casey Quirk, successful asset managers should make five changes to transform their businesses into efficient competitors.
For starters, managers need to allocate resources away from outmoded investment strategies and client segments experiencing outflows to new growth initiatives.
Managers should also streamline operations for efficiency and the ability to bring on new skills and technologies through mergers and acquisitions.
Rounding out the list of things managers need to do to stay competitive in the future is to differentiate their investment strategies with a broader array of active capabilities and strong product development; digitize distribution to reduce costs and more directly engage with customers; and build a consumer-oriented fiduciary brand.