EY’s Advice to Asset Managers Under ‘Acute Financial Pressure’

Falling markets and net outflows have dragged down revenue at many asset managers. Between the fourth quarter of 2021 and the third quarter of 2022, the aggregate of the world’s 40 largest firms experienced a 14.9 percent fall in assets under management and a 22.9 percent decline in revenue, according to a report expected to be published Thursday by EY.

The direct market impact, coupled with rising interest rates and expenses, also crunched earnings: The same group’s operating margins fell by 12 percent during the same period.

The “acute financial pressure,” as EY’s report put it, is definitely on. In EY’s base scenario, which assumes total growth in assets under management of 20 percent from January 2023 to December 2027 — a five-year compound annual growth rate of 3.7 percent — the consultant predicted that profit margins would fall by 4.1 percent by 2027. All else being equal, to maintain average industry margins, assets under management would need to grow 32.7 percent by 2027 (equivalent to a five-year CAGR of 5.8 percent).

Not all asset managers face the same pressure either. “Since the largest asset managers tend to attract the bulk of asset inflows, the majority of asset managers are likely to experience steeper margin decline than these figures suggest,” EY’s report says.

At the same time, firms need to adapt to an evolving asset management industry by continuing to invest in their capabilities, especially in areas like private markets; environmental, social, and governance considerations; and digitization, according to EY.

Eighteen months ago, asset managers were focused on profitable growth. Now, they are trying to simultaneously cut costs and continue to invest in themselves, said Mike Lee, the global leader of wealth & asset management at EY.

Major cost reductions will be required, such as outsourcing certain business functions, slowing hiring, or laying off workers. (BlackRock and other investment firms have already laid off some employees.)

Asset managers will also use this time to rethink their businesses at every level. A strategic shift might be in order and everything should be on the table — but it always was, according to Lee, who has worked at EY for more than 30 years and spent most of that time consulting for wealth and asset managers.

“How can you differentiate yourself in the market?“ and “What do you want to be famous for?” are questions that Lee is asking asset managers.

EY is encouraging asset managers to get more client-centric. They might be able to participate in the “democratization” of alternative investments for retail investors. Or need to “consumerize” how they work with institutional investors, who increasingly expect the flexibility, convenience, and digital interactions typically associated with retail clients, according to EY.

Some asset managers might realize they need to modernize their distribution with better digital capabilities — or reconsider the investment strategies they offer, and where they offer them, altogether.

The companies that can balance their necessary short-term changes with their long-term goals will ultimately be the most successful, Lee said.

“An uncertain future is not a bad one, and disruption will create opportunities as well as threats,” EY said in its report. “Even so, asset managers should clearly understand that incremental change is unlikely to be a sufficient response to the challenges they face in 2023 and beyond.”