Asset management has been one of the most profitable industries for three decades, but a consulting firm has issued a new warning that a quarter of all asset managers will be in dire straits in the next ten years — barring dramatic changes to revenues, costs, or both.
In a report released today entitled "Industrial Revolution: Securing Profitable Growth in Tomorrow’s Asset Management Industry," strategic consulting firm CaseyQuirk predicts that the challenging environment that asset managers are facing today means that a substantial proportion of them will have margins of less than 5 percent — or will be unprofitable altogether — by 2028.
That's assuming that the market continues to grow by 5 percent annually and that the rate at which fees decline stays the same. CaseyQuirk based these projections on data from its annual financial benchmarking survey, done with compensation consultant McLagen.
What's more, measures asset managers are taking to deal with the headwinds aren't working. Between 2014 to 2017, 35 percent of firms cut costs, but got nowhere with their efforts. The median firm in this group cut costs by 0.4 percent, but at the same time, they experienced declining revenues, according to the CaseyQuirk report.
During the time period studied, asset managers’ earnings fell 6 percent, and assets dropped 3 percent as investors withdrew their funds. Meanwhile, investors pressed asset managers on fees, a trend that shows no signs of slowing down.
“Fee pressure continues to accelerate, with year-over-year compression in fees approaching or now passing 5 percent in most asset classes and segments,” wrote the authors of the report, consultants Amanda Walters and Anthony Skriba.
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Although a number of industry participants have said fees are compressing because investors are switching from higher cost active to low-fee passive strategies, CaseyQuirk disagrees.
“A shifting asset mix explains only part of this trend,” the authors wrote. “The primary driver has been pricing pressure in traditional equity and core fixed income segments.”
Some asset managers are trying to use creative approaches to fees.
“Firms are asking, ‘Can we price things differently? Can we think about performance fees on traditional asset classes? Can we give discounts to longtime clients? Or should we think about giving away beta for free and charging for advice?’” said Walters in a telephone interview. “Still, innovation alone can’t combat fee pressure.”
At the same time, costs have grown. CaseyQuirk says costs rose 8 percent last year, with half of that coming from fixed expenses to manage increased regulation, data, technology, and other non-negotiable costs.
The grim picture for the future of asset managers comes as healthy markets have boosted margins and other measures for the short term. Median margins were 34 percent last year.
But 36 percent of firms reported falling margins, even as revenues rose between 2014 and 2017, the period covered by the report. CaseyQuirk says the good economic picture has masked some of the gloomy trends.
There is good news, however, for firms willing to change.
“Reinvesting in competitive advantage pays off: profitable growth firms are buying or building specific capabilities that amplify revenues, generate efficiencies, or both,” according to the report.
CaseyQuirk says firms that are growing profitably have invested heavily in areas such as product development. They have been able to measure future demand for investments — such as private equity, hedge funds, and real estate — as well as recruit talented executives and shutter products and services that aren’t working.
The best firms have also been able to acquire the skills and investment teams that they need. According to the report, top asset managers have four-fifths of their assets in strategies that will be in demand over the next three years.
Not surprisingly, profitable firms have the upper hand when it comes to pricing. They have funds with capacity restraints, giving them power to set prices; they manage investments where low-cost index funds are a poor substitute; and they’ve been able to avoid clients that are particularly sensitive to price.
Asset managers need great leaders to manage the changes that they need to make to avoid an unprofitable future, CaseyQuirk says. For good or for bad, the industry is in the middle of a huge leadership transition, the consultants found.
More than half of the CEOs of large asset managers took over in 2014 or later, according to Casey Quirk. A big portion of the remaining managers have CEOs near retirement age.