Between 2014 and 2017, 25 percent of asset managers were investing in their businesses and increasing their profits, 31 percent were struggling on all measures, and 44 percent were putting money into their firms without seeing any results, according to a study released Monday by strategy consultant Casey Quirk and McLagan, a division of Aon.
The proportion of the industry that is expanding profitably is down from 40 percent in the firms’ previous study, which analyzed managers’ results between 2011 and 2013. “While revenue and profit growth are still highly correlated, increasing revenues is no longer a guarantee that profits will march in step,” Casey Quirk and McLagan said in their announcement of the findings.
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This year’s study included 95 firms with an aggregate $37 trillion in assets.
“We’re starting to see real disruption,” said Jeffrey Levi, principal at Casey Quirk, in a phone interview with Institutional Investor. “I wouldn’t be surprised if an even smaller group of firms experienced profitable growth in the future.” Levi explained that his lack of optimism comes from the market appreciation between 2014 and 2017 that is included in the study’s findings. With more muted market returns expected in the next five to 10 years, asset managers will have an added hurdle to get to profitability, he explained.
Asset managers are being buffeted by a number of trends, including rising regulatory costs as well as data and technology requirements. “A big part of the industry frankly didn’t invest in data and core technology over the years, so there’s a significant spend required to keep the business functioning at a table stakes level,” Levi said.
Cutting compensation — the largest component of asset managers’ costs — is another challenge. “The first mover to take compensation down will lose all their key talent to competitors,” according to Levi.
Profitable asset managers, however, are able to charge a 19 percent fee premium over less well positioned competitors. These managers are able to roll out higher fee products and hold the line when it comes to offering discounts on their pricing.
Top managers grew at a 4.6 percent organic growth rate. Managers that are in cost-cutting mode experienced a 2.7 percent decline in growth.
At the same time, the pay of CEOs at publicly traded firms hit its highest level ever, in part because of the rise in the value of the equity component of executives’ total compensation packages. The study did not capture the compensation at privately held firms, where pay packages are often much higher than at listed companies.