Asset managers will need a significant overhaul to their business models if they are to survive the next five years, and profits could shrink by 2025.
Those are the stark warnings from an asset management study by EY, which says that the next five years will be “much tougher” for investment managers than the previous five, with firms needing to reduce costs by 10.3% under a worst-case scenario if they are to maintain profit levels achieved at the end of 2020.
EY says that even before the Covid pandemic hit in March 2020, there were signs that the “industry’s good times were coming to an end”.
Despite the world’s largest asset managers posting a collective 14.6% increase in assets under management in 2020, more than 75% of that growth was due to market movements. In addition, only a handful of the world’s top players captured investor inflows last year, the so-called “winner takes all” phenomenon.
Even under EY’s most optimistic scenario, which assumes global assets under management will grow 30% over the next five years, average profitability is predicted to increase by just four percentage points over the same period.
EY’s base case, which assumes global assets will increase by 15% over the next five years, would lead to a 0.8 percentage reduction in profits for asset managers.
The lasting impact of the Covid pandemic, volatile flows and choppy market conditions, will require firms to take “decisive action” and address current business models.
“Competition and regulation will erode fees in every asset class, and the shift to lower-margin strategies will also reduce income,” EY warns in its study.
“On top of that, economic and demographic factors will reduce net inflows from historic levels of 3%-4% to around 2% per annum. At the same time, the need to invest in new products and technology will push up spending.”
The EY report suggests that by taking action on costs — such as focusing only on profitable products and geographies, outsourcing non-core functions and automating certain processes — a typical mid-sized firm with assets under management between $500bn and $1tn could achieve savings of up to 15%.
These savings will allow asset managers to plough more money into technology and business growth areas, such as alternatives and sustainable investments or M&A activity.
Some asset managers have already made changes to their business models across areas where they predict growth, such as alternative investments.
HSBC Asset Management announced on 16 June that it had created a new division that will bring together 150 staff and alternative assets representing more than $50bn.
HSBC Asset Management said its alternative assets have doubled to $53bn over the past four years, and that combining expertise in this area was part of its strategy to “reposition the business as a core solutions provider and specialist Asia, emerging markets and alternatives asset manager”.
Others are reshaping their business models, abandoning business lines that are no longer viewed as core.
Standard Life Aberdeen, the FTSE 100 listed asset manager, sold its Parmenion platform to private equity firm Preservation Capital Partners for £102m.
The company has said its strategy is focused on three main areas: global asset management, technology platforms for UK financial advisers and their customers, and UK savings and wealth.
Alex Birkin, global wealth and asset management advisory leader at EY, said: “Even before Covid, the divergence between the industry’s winners and losers was already widening. When you dive into the detail, some had their best year on record in 2020, while others were struggling.”
He added: “You can easily wait 24 months and all of sudden be in crisis management. Now’s the time to invest while there is the luxury of more time and, for some, while profits are there to reinvest in the business.”
To contact the author of this story with feedback or news, email David Ricketts