Strong markets in 2017 and the first three quarters of 2018 have insulated asset managers from intensifying headwinds, according to a study by Casey Quirk, a practice of Deloitte Consulting, and compensation consultant McLagan.
The headwinds cited in the study, “Industrial Evolution: Securing Profitable Growth in Tomorrow’s Asset Management Industry” are organic growth shrinking while costs grow and fee pressure accelerates.
Following 2017’s organic growth expansion of 2.6% within the asset management industry, organic growth outside China is likely to shrink to 1% in 2018. The bulk of last year’s organic growth was driven by high-net-worth and retail investors. Future growth will also be reliant on these segments, as institutional asset owners might not be reliable sources of new growth going forward as they “become focused on income provision.”
Fee pressure continues to accelerate, with year-over-year compression in fees approaching or now passing 5% in most asset classes and segments. A shifting asset mix explains only part of this trend. The primary driver has been pricing pressure in traditional equity and core fixed-income segments.
Total costs rose 8% in 2017, with cost growth previously focused on expenses related to compensation. But expense growth has now shifted to functions impacted by increased regulation or reliant on data, process and technology.
The study noted that one-quarter of asset managers are at risk of becoming unprofitable by 2028, unless dramatic changes occur to revenues, costs, or both.
A shrinking number of asset managers are able to realize profitable growth, with only 30% achieving that from 2014 to 2017, with the median peer group seeing 4.6% organic growth, 12% increase in revenue and 7% cost expansion.
Roughly 35% of money managers engaged in cost cutting to no avail, the study found: The median peer could shrink costs by only 0.4%, while revenue plummeted 6% and assets shrank 3% through redemptions.
The remaining 35% are deteriorating while seeking growth: The median peer saw no organic growth, only 7% annual revenue growth, and annual cost expansion of 8%.
Anthony J. Skriba, a senior consultant at Casey Quirk and co-author of the study, could not be immediately reached for additional comment.