There is a growing divide between winners and losers in global assets management, according to an annual industry study conducted by Casey Quirk, a practice of Deloitte Consulting LLP, and McLagan, a unit of Aon.
The winners are growing and investing in their businesses, while the losers are seeing profits stagnate or shrink.
Between 2014 and 2017, about 25% of firms have managed to increase profits and invest in their businesses; while 44% are saw profits stagnate and another 31% of firms saw them contract.
“In an environment of fee compression and pervasive passive investing, profitable growth is becoming more difficult to achieve,” the firms say in a news release.
Looking ahead, the asset management industry “will continue to bifurcate between winning firms growing profitably and those that will lose out by only increasing revenues and not profits or by experiencing revenue contraction,” Casey Quirk says in the release.
Industry firms must look to increase efficiency by outsourcing non-core functions, investing in technology, and modernizing distribution (by centralizing the sales and compensation processes).
At the same time, firms should focus on products with future growth potential, while minimizing their exposure to stagnant sectors; and, that they should prioritize investment strategies that can produce premium fees.
Indeed, asset managers that are growing profits are enjoying higher than average margins, and are often able to charge a fee premium for certain products, the report says.
“Tomorrow’s successful asset managers must be nimble, willing to invest in strategically significant areas of their businesses, like technology, and outsource those skills that are not part of their core competencies, such as middle and back office functions,” said Amanda Walters, senior manager at Casey Quirk, in a statement. “Coming off a healthy year for the industry in 2017, firms must reinvest some of their income if they want to transform.”
“Winning asset managers will continue to focus close attention on how they compensate top executives and portfolio managers. Their incentive plans will need to provide optimal alignment across all stakeholder groups and their broader talent management systems must deliver a compelling employee value proposition,” adds Adam Barnett, a partner at McLagan.