The U.S. asset management industry’s apparent resilience in the last year and a half has temporarily masked serious challenges related to costs, productivity and growth, according to a report released Wednesday by McKinsey & Co.
These challenges call into question some of the industry’s assumptions concerning the inevitability of profitable growth, says the report, “Entitled Growth in a Time of Uncertainty: The Asset Management Industry in 2015.”
Looking past the return to normal levels of profitability prior to the market declines of third-quarter 2011, the report examines the asset management industry’s underlying performance. The top quartile of asset managers earned an average margin of 46% in 2010, approximately 40 percentage points higher than the bottom quartile of the industry, McKinsey reports.
While assets under management in the second quarter of 2011 surpassed pre-crisis highs, industry profit pools remained 15% lower than pre-crisis highs due to escalating costs and pressure on revenue yields. Growth has proven more elusive than profitability, with only one in five asset managers seeing above-average growth in the past decade.
McKinsey advises that asset management firms will need to bring “investment-like discipline” to their sales and marketing efforts. Asset managers will also need to take a hard look at their maturing lines of business, such as mutual funds, to determine where they can restructure rather that just reduce costs.
By 2012, McKinsey expects independent asset management firms to increase their share to two-thirds of industry AUM “as banks and insurance companies continue to divest their asset management businesses, compensation constraints make it increasingly difficult for banks to compete for talent, and the growing differential between valuations for banks and insurance companies versus asset managers makes it a challenge for them to compete for accretive deals.”
With the market proving unreliable in 2011 and 2012, asset managers will need to tackle the business model issues at the center of rising costs, lower prices and high variability of margins, or risk structurally lower profitability in the years ahead, the report warns.
Looking ahead to 2015, McKinsey cites several trends that will shape the asset management industry and provide the most significant opportunities for growth over the next three years. Among the major areas of growth will be retail alternative products, retirement solutions, ETFs and emerging markets.