The mutual fund industry is facing many of the same challenges confronting the financial advisory industry, requiring similar solutions, according to a new report from PwC.
Fees are under pressure, driving down revenues, clients are demanding more for their money, regulators are demanding more transparency and market appreciation is expected to slow,
The mutual fund industry “is at a critical juncture,” the report states. “Managers can no longer rely on AUM growth and market appreciation to sustain profits in the way that was possible in recent years.”
As a result, mutual fund AUM, which grew at an 8.7% annual rate between 2011 and 2018, is predicted to increase at a 5.6% annual rate over the next seven years, or roughly two-thirds as fast, according to PwC.
PwC also predicts that between 2018 and 2025, total expense ratios of funds will decline 22%, the net number of mutual funds and ETFs will fall 14% and the number of fund companies will decline 20% due to acquisitions and eliminations.
At the same time, it expects mega-sized firms will continue to gain market share at the expense of smaller players, controlling 64% of mutual fund AUM by 2025, up from 55% at the end of 2018, along with passive funds, which will account for 50% of total mutual fund assets, up from 36% in 2018.
By 2025 fund revenues will have increased between 10% and 15%, but cumulative AUM will grow more three to four times as fast, up about 46%, according to PwC.
The PwC report notes that mutual funds have been responding to this changing landscape, adopting new structures such as performance-based fees and zero or minimal fees, and outsourcing certain functions.
While PwC expects those innovations will continue — it predicts fund account outsourcing will almost double from 38% in 2018 to 63% in 2025 and tax outsourcing increase from 50% in 2018 to 70% by 2025 — it stresses four four key areas for fund companies to flourish in the fast-changing environment:
- Strategic positioning: Funds should decide whether to be a niche player that focuses on the firm’s unique strength or scale player that can offer a comprehensive solutions
- Technology transformation: Funds need to adopt an “integrated platform” that manages investments, distribution, reporting, operations and regulatory compliance
- Value for money: Funds should adopt new pricing models and deliver an innovative, technology-enable and seamless client experience
- Battle for talent: Funds need to attract talented fund managers, data scientists and other technologically experienced professionals.