The UK asset management industry is undergoing major transformation and now is a critical time for firms if they want to keep their head above the water.
Deloitte commissioned the Economist Intelligence Unit (EIU) to outline the major challenges facing the industry.
The resulting report highlighted four key strategic decisions facing asset managers:
* What client segment mix will be optimal
* Which distribution model will best achieve goals
* What should be the preferred product and management style
* What is the best way to capture demographic change
With retail investors increasingly using intermediaries with low-cost/high volume business models, this has left power resting in the hands of an increasingly limited number of key decision-makers, or gatekeepers.
These gatekeepers range from platform buylists, defined contribution schemes, discretionary managers to the investment committees at the major wealth managers and financial adviser groups.
Some have gone as far as to suggest that the fate of the industry could lie in the hands of just 150 people, creating a 'winner takes all market'.
'There has been an institutionalisation of the process of the fund-buying process,' said Henderson global distribution head Phil Wagstaff (above). 'More money is in the hands of few people, and often the use similar models to select funds...In this way you end up with a "winner takes all" market.
'Last year around 90% of all UK fund flows went into around ten funds [funds of funds/platforms]. If you have one of those funds you can make hay, but the rest will be on the sidelines.'
The EIU interviewed a number of senior executives at asset managers and identified the following four key industry trends.
Asset managers are faced with the choice of building a direct retail business or strengthening their intermediated processes.
Schroders head of institutional Adam Troiano believes that forging partnerships with insurance-owned platforms will be a key area of growth for mid-sized asset managers given insurance companies are increasingly outsourcing to and partnering with fund firms.
Wagstaff does not see much value in targeting the direct market. 'Our strategy is as a branded manufacturer, not a platform provider. While we have direct clients, it is not our intention to offer them the full functionality of a platform to attract new direct clients.'
He added: 'We are building long-term strategic partnerships as part of guided architecture offerings for key distributors, including third-party and sub-advised.'
Troiano also believes geographical diversification is key. 'We do business in 30 countries. We have a domestic business in each of those countries as well as selling international products. Therefore, no one consultant dominates our overall revenues.'
Diversification also extends to product development points out Jörg Ambrosius, senior vice president at State Street Global Advisors. 'We see asset managers going into new alternative asset classes, which requires investment and know-how.'
The EIU said creating higher alpha products is vital to compete with hedge fund managers, with fund firms also looking to take advantage of AIFMD and Ucits to expand their product reach into new territories.
Wagstaff highlighted how quality products can enable pricing power. 'Product differentiation is critical. Risk-adjusted, combined with a strong process and first class customer service and a strong brand, will differentiate and enable higher pricing.'
This differentiation is key for traditional asset managers as the competition from passive funds increases.
Vanguard's European head Thomas Rampulla underlines the challenges active managers facing in dealing with the passive onslaught.
'Across all of our products, we're focused on providing the best possible quality at the lowest possible cost,' Rampulla said. 'By quality we mean tight tracking from our index funds, robust product design and first-class customer service and client communications.'
While strong products may help asset managers justify the fees they charge, they remain under intense pressure to lower charges, both from gatekeepers and passives.
Some fund managers have introduced 'semi-active' funds to meet the passive challenge. This has been met with mixed success with Terry Smith's £1.6 billion Fundsmith Equity fund the poster boy of these strategies, while products from JP Morgan and Schroders have had much less success.
On more traditional products, some asset managers are seeking ways to create more variable pricing with platforms and clients and are seeking ways to introduce more sophisticated pricing by type and style of fund, product and distributor.
'Find platforms are not distinguishing between the type of client, but are trying to negotiate a single price across all their clients,' Rathbones chief executive office Mike Webb (pictured) said.
'But fund managers still need to persuade the end user to use their products. It is nonsense to sell to an individual IFA firm with two adivsers at the same price as a regional IFA. This was easier in the days of cash rebates, which were simple to administer.
'It is more complex in the world of unit rebates, and fund managers are unwilling to knock another 10 basis points off their fees.'
There are considerable cost challenges facing the industry. These include systems upgrades, the battle for talent raising staff costs, while at the same time managers need to generate alpha to justify higher fees.
Most asset managers have employed limited cost-cutting and more disciplined spending, highlights the EIU. For example, Aberdeen plans to launch a cost-cutting programme over and above that required from its acquisition of Scottish Widows Investment Partnership.
Ambrosius pointed out that companies outsourcing functions in a number of different ways to keep down costs.
'The boutiques are in trouble because of the new regulatory requirements, and they have decide whether to renovate their infrastructure totally or go for a one-stop-shop solution and focus on making investment decisions,' he said.
'The mid-sized asset managers are asking: What is our future business model? If they are too small to play at scale, how can they compete?'
'[Meanwhile] the larger asset managers are outsourcing, but it is a more component-based outsourcing. They may just outsource a system. Data management is a system where many are outsourcing.'
The EIU believes over the longer-term asset managers need to engage fully with these 'seismic' shifts. It is essential the industry understands its own cost base, products and pricing, along with those of its competitors.
'How well traditional asset managers adapt their distribution strategies and product mix will determine whether they will keep a place in this new, more concentrated and cost-focused market,' said the EIU.
'[And] how well they can manage the gatekeepers will determine whether they - or another part of the value chain - are the ones that come out on top.'