Investment management firms operating in Europe will see a tougher year in 2019 as costs are going to eat away at money managers' profitability from multiple angles.
Expenses associated with relocating offices to Europe when the U.K. leaves the European Union and lower revenues in more volatile macroeconomic conditions as Europe ends quantitative easing are just a few sources of pressure.
The bulk of costs, sources said, will come from having to adapt to regulations and investing in technology.
As a result of regulation, Luba Nikulina, global head of manager research at Willis Towers Watson PLC in London, said, "margins are getting compressed because money managers' costs are increasing."
According to a study by McKinsey & Co., the costs of managing portfolios for firms in Western Europe have been the highest since 2007, increasing 10.2% in 2017 compared to 2016. These portfolio costs were followed by a 5.2% increase in costs associated with investment in technology in the same period.
"Money managers have had to step up the level of reporting and (enhance) systems that can keep up with the level of reporting that is required by regulation," Ms. Nikulina said.
Glenn Poulter, head of business development, global markets, at Northern Trust Capital Markets in London, said it is especially difficult for midsize managers, those with less than $100 billion in assets under management. While all managers face the increases in overall operating costs, some 95% of net new assets went to the 10 largest managers in 2018, he said.
"These (midsize) managers are getting squeezed out as average outflows in 2017 were around 6%, which is three times greater than managers running $500 billion or more. Average gross margins could fall as low as 27% from 38% with a market correction. In 2017, assets grew by 13% at the same time revenues grew 9% but so did operating cost to 8%," Mr. Poulter said.