A white paper has outlined the severe tension within the global asset management industry.
The paper, titled Survival of the Fittest: Defining Future Leaders in Asset Management, was published by Casey Quirk (CQ), a Deloitte consultancy.
It outlines how asset managers need to adapt to a 'new age', warning that 'unprecedented fee pressure' and slow growth will force firms across the globe to cut costs and transform their business strategies to survive.
The paper highlights some less than complimentary defining characteristics of the industry, which may not make pleasant reading for asset managers. These include lower capital market returns, shrinking asset growth, and widespread portfolio de-risking.
In parallel, the industry is facing increasing regulation of investment advice and technological changes which circumvent traditional asset managers, posing further long-term challenges.
Last month's interim study by the Financial Conduct Authority on asset management is an example of the growing regulatory pressure facing fund firms.
The challenge for the industry is underlined by a marked slowdown in organic growth levels, which have fallen from 3.5% before the credit crunch to 1.7% between 2009-2014.
CQ warns growth will fall below 1% in the near future. It cites the Chinese market as an exception, saying its assets within fund wrappers are likely to grow as fast as the rest of the world combined.
To make matters worse, expected lower returns from capital markets can create 'dramatic' pressure on asset management fees and profits, CQ points out.
'Near-zero interest rates and the end of a secular surge in growth worldwide could slice future capital markets returns in half,' CQ said.
'Asset managers and advisors will need to slash fees to maintain the same long-term ratio of fees to returns, which historically has hovered around 25%.'
Taking this into account, CQ predicts median profit margins for asset managers will drop from 34% to 28% in five years.
'Asset managers face the strongest headwinds yet as an industry,' said Ben Phillips, a principal at CQ.
He does see positives though.
'One-third of asset managers are still growing their market share by embracing new, differentiated strategies that reflect changing realities, as well as supporting products and services that appeal to sceptical investors.'
Four key developments
The paper outlines four key capabilities the most resilient asset managers are developing.
These include a broader investment toolkit, which have evolved from legacy benchmarked products to actively managed capabilities.
Brands have also become increasingly important with trust, investment leadership and the ability to regularly meet investor expectation critical.
The customer experience and data about clients and markets are the other two ways leading firms are trying to differentiate themselves in these tough conditions.
'State-of-the-art distribution technology, investment advice that appeals to consumers, and better use of data will help successful asset managers secure their market positions,' Phillips noted.
'Some future winners will be names the industry might not even consider now, and many of today’s key players will face consolidation if they can’t or won’t change.'
Five 'bold' changes
In order to succeed, CQ has identified the five following 'bold' changes firms should make.
* Allocate resources away from outmoded product lines and client segments experiencing outflows to new growth initiatives and buyers expanding more quickly
* Streamline operations for efficiency and ability to bring on new skills and technologies through mergers and acquisitions
* Differentiate investments with a broader array of active capabilities and strong product development processes
* Digitise distribution to reduce costs and more directly engage with customers
* Build a consumer-oriented fiduciary brand