Money managers will need to focus on distribution changes to survive, as disruption in the investment management industry will have more of an impact on product delivery than on investments, according to a report from Oliver Wyman and Morgan Stanley.
In an extreme case, money manager distribution could move to an "Amazon-type marketplace," with funds directly provided to end clients, eroding money managers' control, said the report, "Wholesale Banks & Asset Managers: Winning Under Pressure." Such a distribution change could put up to 50% of a manager's overall fees at risk.
Also, managers looking to create their own outsourced chief investment officer business could gain revenue but also could see revenue declines trying to move into an industry already populated by consultants and other firms providing OCIO, the report said.
The report recommends managers focus their data science on distribution, as only a few larger managers — those with more than $500 billion in assets under management — have the scale to gain alpha from applying machine learning from data and artificial intelligence to their investment processes. Much of the data and algorithmic processes on the investment side, the report said, are publicly available; meanwhile, with distribution, the cost savings through automation could reach an average of about 20%, with outsourcing saving another 10%.
By 2020, according to the report, assets under management are expected to rise a cumulative 10%, but fee pressures and a continued move by investors to passive investment will lower revenues by 13% .
That would continue a trend in which managers' AUM has outpaced revenue on a percentage basis from 2011 to 2016, the report said. Assets grew an annualized 6% during that time span, while revenue grew an annualized 4%. In 2017, AUM rose 13% and revenue increased 9% — a 4-percentage-point spread that the report's authors expect to increase in coming years. Also, annualized overall costs were 3% from 2011 to 2016, but 8% in 2017; margins — the difference between revenue and cost — were an annualized 1.5 percentage points from 2011 to 2016 but only 1 percentage point in 2017.
"Lower market returns combined with fee pressure will force the industry to evolve its stubborn cost structure," the report said. "A bear case could force much more significant reduction."
The full report is available on Oliver Wyman's website.