The Asset and Wealth Management Industry is at a turning point. Fee pressure is top of mind for asset managers across the globe. Despite continued increases in revenues and AuM as a result of high-performing markets and managers, the two are not growing in lockstep.
Asset managers are facing increasing pressure from investors and regulators to decrease their fees, while price competition and product innovation continue to mark the current AWM landscape. This has resulted in an industry-wide trend of margin pressure across all asset classes, causing the ratio of revenue to AuM to fall by 9.81% between 2012 and 2017. In order to make up for this fall in income, asset and wealth managers have had to control their costs. So far, they have been effective in doing so and margins have been maintained - growing by 15.91%. However, margin pressure is set to intensify over the coming years, and we estimate average asset weighted management fees could fall by almost a fifth by 2025. In face of this, asset managers will have to make significant changes to their operating models to ensure that they survive and thrive into the future. Our newest report AWM Revolution: Pressure on Profitability, which builds on the previous AWM Revolution publication, predicts the future of these pressures, and outlines four foundations on which managers can build a future-fit operating model.
Fee pressure felt across all asset classes
2017 was another record year for the AWM Industry. Global AuM reached US$98.1tn, a 53.7% increase from 2012. That being said, the industry's revenues have failed to keep pace, growing by only 38.5% in the same time-period. In addition, we predict that revenue to AuM will fall further, from 0.40% in 2017 to 0.31% in 2025. This decline is a direct consequence of the decline in mutual fund fees that is currently affecting the industry and will continue to do so at an accelerated pace.
Exhibit 1: Evolution of global mutual fund management fees by region, 2012 - 2025 in %
Active players are likely to lower their management fees by 19.3% by 2025, reaching 0.44%. Europe is set to see the strongest decline, as MiFID II comes into action, investor scrutiny grows, and the proliferation of low-fee products - such as passives - continues. Institutional investors are flocking to passives due to their transparency and low fees. Retail investors are following suit, with increased passives allocation across the entire investment industry. However, despite already boasting relatively low fees, passive fees are expected to decline further, by 20.7% up until 2025. The famous ‘race to zero' within passives has long been a topic of discussion, and the finish line appears to be fast approaching; with a number of major players launching zero-fee platforms. The remaining passive managers will need to take action, lowering their fees or risking obsolescence.
Fee pressure is evident in alternatives as well. Global alternatives AuM rose by 67.3% between 2012 and 2017; due to strong interest from both institutional and retails investors. The increased availability of alternatives assets has in turn forced alternative managers to lower their fees in order to remain attractive to investors. Historically, alternatives have stuck to a 2/20 fee model. However, we are now seeing many players departing from this structure, particularly new entrants, and making the move towards outcome-based fees. We predict a further decrease across all alternative products up until 2025.
Global alternative management fee decline, 2017 to 2025
This industry-wide lowering of fees has had a visible impact on asset managers' ratio of revenue to AuM, which have fallen by 9.81% between 2012 and 2017. We project this decrease to continue as this fee pressure persists, falling a further 22.4% from 2017; all the while the revenue pool continues to grow. So far, managers have been able to compensate for this decrease by streamlining their operations, decreasing their ratio of costs to AuM by 15.36%. However, the question remains, what will happen if there is a downturn? Managers must capitalise on the current period of growth to prepare themselves for a possible future decrease in both AuM and revenues.
Asset managers are not without solutions to these pressing issues. A vital restructuring of business operations, from top to bottom, is needed. Asset managers have historically been hesitant to embrace change, but time is of the essence if they are to survive and thrive into the future. AWM Revolution: Pressure on profitability establishes four foundations on which asset managers can base an operating model that will ensure they are able to overcome these margin pressures:
1. Articulating value for money: Asset and Wealth managers are facing intense investor and regulatory pressure to provide value for money. Investors want more for less, and regulators want firms to provide value other than providing returns for investors. In order to meet these demands, managers must lower their costs and rethink their fee models and operations. This includes cross selling, fee innovation, and innovating product offerings. Smart beta and active ETFs are particularly promising options for managers, reaching investor target outcomes at lower prices.
2. Strategic Positioning - what's the plan? If asset and wealth managers are to succeed in an ever-changing investment landscape, they have some important decisions to make. They must reconsider their product offerings and operating models, in order to ensure that they align with investors' wants and needs. Firms must choose between going niche or scale. They must also undertake product rationalisation, closing underperforming and costly funds.
3. Transform through technology - or be eliminated: In order to operate efficiently while keeping costs at a minimum, asset managers must digitise their operations. The emergence of digital technologies such as Artificial Intelligence and Machine Learning is a significant opportunity to streamline operations. Historically, the AWM industry has long been a digital laggard. However, time is running out and these managers must embrace these technologies, or risk feeling the increased pressure of declining margins.
4. AWM - fight the battle for talent: As the investment landscape changes, it follows that the investment workforce must also change. In order to harness the opportunities provided by the digital technologies that are redefining the industry, asset managers must search for tech-savvy and young workers. In order to do attract and retain this future workforce, the AWM industry must rethink its working culture and upskill its current workforce.