Challenges Facing the Asset Management Industry

A McKinsey analysis of the asset management industry shows that growth has been more difficult to achieve than profitability, with only one in five asset managers sustaining above-average growth rates over the past decade.

In its latest report, “Growth in a Time of Uncertainty: The Asset Management Industry in 2015,” McKinsey contends that the U.S. asset management industry’s resilience in the last year and a half has drawn attention away from some serious challenges related to costs, productivity and growth. 

Pointing out that by late 2010 and early 2011, the industry had already demonstrated its resilience by recuperating from the financial crisis – assets under management (AUM) had recovered to their pre-crisis peaks, overall profit margins were up by 5 percentage points from crisis lows – and back to their long-term average in the high 20s, and the double-digit cost and compensation increases of 2010 were on track to repeat themselves. As McKinsey explains it: “At the start of 2011, even pessimists seemed to believe that the good old days were making a comeback.”

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“Market volatility and the renewed risk of financial earthquakes in the second half of 2011 not only put a damper on this optimism, but also called into question some of the industry’s beliefs about the inevitability of profitable growth. Today, leaders of asset management firms are expressing deep uncertainty about the future direction of markets and turning their focus to the next quarter’s margin rather than thinking strategically about longer-term growth,” the report suggests.

McKinsey reviewed a decade of results from its annual benchmarking of U.S.-based asset managers, conducted an analysis of hundreds of asset management firms, and interviewed industry leaders. The major findings from this research include:

• While overall profitability has been strong for most firms through the cycle (averaging 28%), deeper structural issues remain. Even when assets peaked in early 2011, overall profit levels remained more than 20% below pre-crisis levels, due to increased costs, reduced productivity and lower pricing.

• Growth has proven far more elusive than profitability, with only one in five asset managers sustaining above-average growth rates over the past decade. Moreover, the sources of growth were surprising to McKinsey. Investment performance explained only one-third of growth; generalist business models seemed to underperform; and scale was not much of a factor. Finally, while M&A had a modest impact on growth industrywide, for the top firms, it was a significant factor.

• The market appears to place a higher premium on sustained above average growth than on top-quartile profitability. However, most asset managers lack the conviction to make significant and continued investments in growth. There is also a broad consensus around the trends that are driving growth, but that consensus has not translated into proportionate business investments. Although caution is understandable in times of market volatility, the reluctance to invest in growth was evident even in 2010, which saw double-digit cost increases, but only 2% to 3% of those increases directed toward growth. 

McKinsey developed seven quantitative predictions regarding how the industry might evolve in 2015, from growth in retirement solutions, retail alternatives and ETFs, to the pace of international expansion, the need for greater cost discipline, and the role of M&A and winning business models. While management teams may disagree about the pace and magnitude of these changes, the intent of these forecasts is to stimulate debate and greater conviction around a path forward for asset management firms.

The report also presents a five-part management agenda with critical questions that every asset management executive team should consider as they position their firm for the years ahead.

The complete report is available here.  

Engaged, yet On Edge

Charles Schwab clients’ financial sentiments declined in the third quarter, hitting the lowest level in two years.  

However, the Charles Schwab survey also found that its clients are continuing to engage in the market and remain focused on their long-term investment plans.

Schwab found that investors are optimistic about opportunities in the current market: nearly half (45%) of clients surveyed say now is a good time to invest. Another six in ten (64%) say they would sooner invest a windfall than save it for a rainy day.

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Yet more clients say they feel financially “worse off” (26%) than “better off” (23%) compared to a year ago. And although clients feel equally confident making investment decisions (37%) as they did at the end of the second quarter, their financial discomfort intensified during Q3; 23% now say they feel “better off” financially compared to a year ago, compared 44% who felt that way in June.

“Clients are concerned and uncomfortable with market and economic uncertainties but they aren’t over-reacting,” said Walt Bettinger, Charles Schwab president and chief executive officer. “We’re continuing to encourage investors to talk to us about their goals, timeframes and risk tolerance, which form the foundation of a good investment plan. Confidence and resilience tends to be higher with investors who understand more clearly how their investments fit into an overall plan,” he said. 

In Q3, Schwab clients maintained their cash holdings at close to pre-crisis levels and continued to be net purchasers of securities. The survey reveals that only 19% of clients moved assets into cash in Q3 and even fewer (17%) say they moved to the sidelines in response to recent market volatility.

Bettinger noted that although there are still investors who prefer to work independently, client interest in receiving professional guidance is on the rise. At the end of September, enrollments in advisory solutions stood at a record 2.4 million accounts, up 153,000 from September 2010. For the same period, core net new assets totaled 17.6 billion up 21% from last year, and clients opened 191,000 new brokerage accounts. Client assets totaled $1.58 trillion at month end September.

The Schwab Survey of Investor Confidence was conducted in September 2011 and included more than 1,000 retail clients.  

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