For the investment management industry, the world has changed. The ‘new normal’ is far tougher than ever before: revenues have plummeted, the rivalry is at an all-time high, costs have remained sticky, and there is a huge disparity between the industry’s leaders and failures. With the rocky, undefined path that financial administration is currently on, we can isolate prime factors that influence the industry’s direction.
- The Economy: The economies of the West face enormous challenges. Many issues are putting a strain on social cohesion: from austerity measures aimed at bringing down sovereign debt to high levels of unemployment (especially among the young). At the same time, the once inexorable growth in personal prosperity is now under threat.
- Regulation: In the current climate of client distrust, control is becoming far more than just a cost: it is helping to shape the industry. For example, in the UK, the Retail Distribution Review aims to encourage fee-based advisory models and impose more rigorous professional and disclosure guidelines on consulting services. The effect is likely to be a significant consolidation of distributors, which will place even more power in the hands of the customer. More broadly, tighter regulation will increase the costs of running and distributing funds. Consequently, it will reinforce the shift in new fund offerings from active to passive asset management (see below). Also, some fund managers may change jurisdiction in pursuit of a more ‘friendly’ regulator and tax administration.
- A Continued Transfer of Power from Asset Managers to Distributors: Demographics and increasing individual ownership of pension provision is creating a wall of money from retail investors that can only be accessed if asset managers and their distributors work closely together. It is clear that with personal client-end ties becoming essential, the influence transfers to the dealer and not the capital allocator. The latter ascertains the commodities consumers will receive, establishing options for funding directors. Increasingly, an asset manager’s success is being determined by the performance of his/hers distributors.
- The Rise of Passive Asset Management: The distribution of Passive and Exchange Traded Fund (ETF) products is growing rapidly worldwide. Asset managers that have large stakes in active management and fail to consistently deliver a market-beating return have come under severe pressure.
- Competition: The gap between winners and losers is widening, because of the fierce competition for retail and institutional inflows, coupled with rising costs and increased transparency. At the same time, the asset management industry is becoming increasingly international, as the large global players absorb struggling local firms to widen their client base.