The key long-term battles facing asset management firms Tuesday 17 Nov 2015

The key long-term battles facing asset management firms

 

Annualised organic growth in the global asset management industry has been tipped to shrink below 2% by 2020.

This is according to a white paper from consultancy firm Casey Quirk & Associates, which also forecasts that 120% of net inflows into will come from private investors by the next decade, an increase from 90% in 2014.

For asset management firms, this will accelerate a focus on hiring and retaining talent, outcome-oriented product innovation, brand, market-leading systems, and risk management, according to the paper, titled “The Roar of the Crowd: How Individual Investors Transform Competition in Asset Management.

The researchers point out the economics of the industry remain attractive with revenues and operating profit margins touching all-time highs in 2014. While Casey Quirk says dynamics remain positive despite the market volatility of 2015, it fears too many firms are chasing slower-growing business.

It highlighted pressures are also coming from new entrants, with 20% more asset managers supplying the industry and intensifying competition, in turn creating greater fee compression in the marketplace.

The consultancy urged firms not to ignore the growing importance of the individual as a major growth driver, saying this shift in the market place represents both a 'challenge' and an 'opportunity' for asset managers. Assets fully integrated under investment advice have grown nearly twice as fast as traditionally intermediated assets since 2008.

Long term changes

The rise of the individual investor also will accelerate some longer-term changes in the industry, according to the firm.

These include the widening in the range of profitability between successful and unsuccessful asset managers and new engagement model and product set to capture the imagination of the individual.

The rise of online intermediation is a threat and while tech providers will not necessarily become direct competitors to asset managers, they have the capacity to ally themselves with a range of financial services companies to support advice delivery to individuals.

Other key changes could see those firm with bigger brand budgets become more effective owners of asset managers. This could spur M&A activity and encourage industry concentration.  

Finally, while investment performance remains a key ingredient of success, the white paper suggests it will become more difficult to report, measure and compensate (through fees) in an outcome-oriented, individual-driven world, making brand more important.

'Producing a slightly better mousetrap is not going to cut it in this era of individual investors guiding investment flows, said Benjamin Phillips, a co-author of the paper and a partner at Casey Quirk.

'Going forward, asset managers will face growing competition from larger financial services firms and will only prove their value by offering differentiated value propositions, strong performance, especially in outcome-oriented investments, and the brand to back it up.'

Four major challenges

The White Paper concludes traditional asset managers will be challenged in the following four ways:

* Products

'A focus on outcomes will help fuel nearly $4 trillion of demand between now and 2020 for multi-asset and benchmark-agnostic strategies worldwide, partly funded by redeeming active benchmark-oriented products.'

* Services

'At least 70% of US financial advisors want more investment-oriented, resource-intensive advice from asset managers, a sentiment reflected globally.'

* Productivity

'Distributing to individuals is at least one-third less efficient than selling to institutions, reducing industry leverage.'

* Regulation

'Policymakers worldwide will call for objective and discretely priced investment advice, re-arranging economics for asset managers.'