Expectations of lower investment returns, and the resulting lower profit margins for money managers has some industry observers saying it's time for active equity managers to radically change their fee structure.
"This beautiful bull market we've had so long, you'd think fees don't matter," said Steve Voss, senior partner, Aon Hewitt Investment Consulting, Chicago. "But with increasing transparency and the fact that the bull market will end, I think it's reasonable to see 5% to 6% (annual) equity returns in the future and 1% to 3% for fixed income. That will have a greater impact on lowering fees and changing structures."
Added Christian Edelmann, partner and global head, corporate and institutional banking and wealth and asset management, at management consultant Oliver Wyman, London: "There's a lot of experimenting, but not a lot of change on the asset management level. It's mostly still negotiation, with asset owners using existing structures."
The impact on margin, said Mr. Edelmann, is evidenced in a March 16 report he co-authored with others at Oliver Wyman and New York-based Morgan Stanley. The report shows margins among money management firms have started to decline and will continue.
From 2011 to 2016, the report said, managers' cumulative assets under management grew an annualized 6% while revenue grew an annualized 4%. In 2017, AUM rose 13% and revenue increased 9% — a 4-percentage-point spread compared to the 2-percentage point spread in the previous years. Also, the report said, 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.
And by 2020, the report continues, AUM is expected to rise a cumulative 10% while fee pressures and a continued move by investors to passive investment will lower revenues by 13%.
"Lower market returns combined with fee pressure will force the industry to evolve its stubborn cost structure," the report concluded.