As promised several weeks ago, this post will look at a recent joint report from Oliver Wyman and Morgan Stanley. The report, an analysis of the past, present, and future factors impacting wholesale banks and asset managers’ revenue, includes a survey of senior executives from the latter industry with $15T in assets under management. The sentiment and thesis of the findings and report are that the end of Quantitative Easing (QE) and changes in regulation, technology, and market dynamics have led to passive investing and contracting margins. The future of traditional asset management, as the way things stand now, does not look promising. Then again, with the current state of managers described as “miserable” by Martin Gilbert, co-founder and CEO of Aberdeen Asset Management, could the situation really get any worse? Apparently so.
Key insights and recommendations and corresponding data from the report are as follows:
- Fee pressure will not abate anytime soon and, in fact, intensify industry challenges.
- With passive investing at one end of the fee spectrum and hedge funds at the other, the strategies saw average fees fall 16 percent and 6 percent, respectively during 2016, whereas core active strategies suffered a 2 percent squeeze.
- Revenues will continue to fall through 2019.
- The report expects that revenues will fall 3 percent from current levels by 2019. This is due in large part to the aforementioned fee compression and a shift in the industry’s product mix.
- The worst case scenario outweighs that of the best.
- While a robust economy would increase AUM growth, providing an opportunity to create alpha, and therefore reduce margin pressure, the downside risks are higher, with the former scenario increasing revenue by 15-20 percent and the latter driving it down as much as 30 percent by 2019.
- Price is a growing factor in asset manager selection.
- Over the past year, price has been the primary factor in reallocation, with it accounting for over 50 percent of AUM shifts, compared to 30 percent from 2010 to 2012.
- Rising regulatory costs contribute to these challenges.
- Examples of the regulations managers must tackle in the near future are MiFID 2 in Europe, the DOL Fiduciary Rule, ETF scrutiny, liquidity oversight, and business model validation.
- Establishing cost controls is imperative.
- Because of a historical reluctance to invest in and adopt technologies, asset managers must now increase IT budgets by an extra $20-25B over the next 3 to 5 years in order to meet client expectations and establish critical operational efficiencies.
- Firms must radically review each internal function—outsourcing as much of their back-office operations as possible and dramatically consolidating and eliminating older, underperforming product offerings for example—with the objective of saving of 3 to 4 percent per year until 2019.
- A quest for efficiencies will continue to drive consolidation.
- M&A activity is up 150 percent since 2012.
- While the 10 to 15 percent cost savings typically associated with scale-driven M&A could buy valuable time, the report believes that unless the aforementioned challenges are addressed and recommendations pursued, meaningful regeneration will not take place. And that’s if the merging of two cultures and sets of capabilities is organizationally successful.
The sheer number of reports, and included data points, on the plight of asset managers can be overwhelming, but they do not exist as irresponsible catalysts for panic; in fact, it could be declared that the industry is more than likely beyond that stage. Instead, these studies are representative of reality, jibing with what senior executives like Aberdeen’s Gilbert are saying on record almost every other day, and deserve serious attention if proactive, progressive firms are to survive the next few years.