Asset managers should brace for looming threats to profitability by making aggressive moves such as acquisitions, according to Boston Consulting Group.
While last year's profits were “exceptionally good” for managers, the bull market is providing only a temporary reprieve from the pressures facing the asset management industry, according to the consulting firm's report Friday.
Rising revenues and assets resulted in industry-wide profit margins of 38 percent last year, a slight uptick from 2016, according to the report. But by 2021, Boston Consulting Group expects profit margins to revert to their downward trajectory, potentially falling to as low as 27 percent in the event of a severe market correction.
Asset managers should not let their recent success “blind them to the underlying trends that are putting pressure on their margins,” Boston Consulting Group partner Renaud Fages warned in a statement Friday. These trends include declining income from fees, as well as other revenue pressures such as the costs of investing in new technology and complying with new regulations, according to the report.
Brent Beardsley, a senior partner at Boston Consulting Group, said in the statement that “bold moves” such as acquisitions or “radical” technology overhauls will be required for asset managers to succeed in this environment.
“These are daunting challenges, but the extraordinary market-led performance of 2017 puts many players in a strong position to take them on,” Beardsley said.
Last year asset managers saw new net inflows equal to 4.3 percent of assets under management – the highest tracked by Boston Consulting Group since the 2008 financial crisis. Between the money pouring in from investors and rising equity markets, the average manager’s assets under management expanded by 11 percent, with revenues increasing by 9 percent.
Meanwhile, the downward pressure on fee income continued in 2017, with fees dropping by about 0.4 basis points, according to the report. Fees as a percent of assets under management have declined by about 3 percent annually for the last three years.
Although the shift by investors to cheaper passive strategies is often blamed for declining fee income, the firm said this has been largely offset by money flowing to high-fee alternatives and “solutions” products. The consultant attributed pressure on fees primarily to competition among asset managers for the business of the largest institutional investors and retail distributors, which have a lot of bargaining power.
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Even if a significant market crash does not come within the next four years, the consulting firm expects the current pressures on asset managers to cause profit margins to slip to 36 percent in 2021.
“The strategic problem for asset managers is not the need to know what is coming, but the need to take the actions required to stay in front of whatever occurs,” Beardsley said in the statement.