The coronavirus pandemic has added kindling to the cost and fee pressures that have been smoldering in the asset management industry for years, according to Brown Brothers Harriman.
The bank reported Tuesday that fifty-two percent of asset management firms plan to reduce expense ratios, or fees, over the next 12 months, according its new survey of asset management executives.
The survey questioned C-suite executives on subjects including new products, costs, operations, outsourcing, and remote work arrangements. BBH interviewed CEOs, CFOs, COOs, and senior executives at global asset managers that included large multinational asset managers and smaller boutique firms.
“Fee compression, compliance and regulatory changes, low organic asset growth, and rising technology costs fueled by rapid innovation have all weighed on asset managers,” wrote BBH partner Chris Remondi in a report on the findings. “Enter the COVID- 19 crisis, which accelerated the pace of many of these challenges.”
According to the report, fee pressure is coming from big managers that benefit from economies of scale in certain products, as well as from the increased transparency around fees in recent years. One respondent said that “continuing fee pressures are a concern when it comes to revenue retention – it is no longer acceptable to simply pass along operational fees.”
Fees are also coming under pressure in private markets, according to a separate survey of asset allocators. Among the 500 institutional investors polled by Natixis Investment Managers, 80 percent said fees for private assets — including private equity and hedge funds and private debt funds — are too high. Another 25 percent said they worry about fees increasing further “as investors compete for a place in fewer and fewer deals.” Private assets have exploded in popularity among these investors in recent years, with some 80 percent of survey respondents saying they are invested in private assets and two-thirds saying they will play a more important role in their portfolios in the future.
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In the BBH survey, 35 percent of asset manager respondents said they are considering developing a range of new strategies to better compete amid the economic and fee pressure, including alternative investments, exchange-traded funds, and separately managed accounts. In addition, asset managers are looking to eke out better performance by optimizing everything from securities lending and foreign exchange to other operations.
Three-quarters of executives said they are changing their capital allocation plans because of Covid-19, with 49 percent looking to reduce the amount of money they spend on real estate. The plans to downsize offices come after most managers have found success with remote work during the pandemic. According to BBH, 77 percent of respondents to the survey said the transition to work arrangements outside the office was seamless at the start of the pandemic. The remainder said early kinks have since been worked out.
However, asset managers still want an office presence: BBH reported that 48 percent of respondents expect about half of their employees to return to their offices in the second quarter of 2021.
While the largest proportion of respondents said office space reductions would be their source of cost savings over the next 12 months, respondents were also looking to cut costs elsewhere. Thirty percent of executives planned save money on staff, 27 percent on operations, and 22 percent on marketing.