After Steepest Fee Drop Ever, Managers Are Bracing for More Pain

Even after record declines last year, fee compression could get worse as global markets gyrate, according to Casey Quirk.

Illustration by II

Illustration by II

Asset managers had no pricing power during the long bull market, and the recent increase in market volatility around the globe could take an even greater toll on fees.

“One of the biggest challenges we’ll see in a market like this is that assets under management won’t grow as quickly as they have,” Amanda Walters, a principal at asset management strategy consultant Casey Quirk, said in a phone interview. “And when volatility dampens AUM, fee attrition could accelerate more.”

The long bull market saved even mediocre managers from fully feeling the effects of damaging trends like the move to passive investments. In 2019, fees at publicly-traded U.S. traditional asset managers declined 6.1 percent, a record, according to Casey Quirk, which is part of Deloitte.

Margins for public U.S. managers fell by an estimated 20 percent over the past five years, even as equity markets rose dramatically, according to the consultant.

In 2015, the median operating margin was 34 percent. That figure dropped to 27 percent last year. Historically, there has been a tight correlation between strong market returns and asset managers’ financial performance.

“Over the past five years, there’s been significant capital appreciation in the market,” said Walters. “Even if firms weren’t doing that well with performance, their assets tended to rise because of the markets,” she said. “That rise cushioned fees compressing.”

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Despite rising markets, asset managers didn’t have any power to raise their prices for investment management. Now that market sentiment is swiftly changing, they’ll have even less power, said Walters.

“Fee drops have been primarily driven by the investors,” she added. “The investor has a lot more power than they used to and there is an oversupply of asset managers. Investors go with the best deal, pitting one manager against the other, sometimes over a few basis points.”

Although there has been little organic growth since 2015, the biggest reason behind lower profit margins at public managers has been the drop in fees, according to Casey Quirk. Public firms’ revenue generated from investment management declined more than 22 percent from 2015 to 2019.

“There is a flip side to volatile markets,” said Walters. “There’s an opportunity for active managers to outperform.” Still, investors who have moved into passive strategies for a particular asset class, aren’t likely to move anytime soon, she added.