Strategic priorities for the asset and wealth management industry

27 June 2017 Consultancy.uk

To stay ahead of the game, asset managers should focus their sweet spots of growth while keeping costs in tune, according to a new study. Triangulation techniques meanwhile were discouraged, with unnecessary diversification strategies, in favour of ramping up digital efforts, improve their marketing and collaboration with FinTech’s.

In a new report from Roland Berger, the management consulting firm explores the key trends in the globe’s asset management industry. The firm’s analysis finds that the industry has been seeing mixed fortunes in recent years. 

Whilst global Assets under Management (AuM) have grown strongly off late – mainly the result of the emergence of a new middle class in many parts of the world (new groups of savers) and growing retirement savings on the back of an ageing population in Western markets – the industry has not been able to translate that into better revenue margins. In 2012, global AuM stood at $47 trillion, lifted by an average growth rate of 7% per annum the number reached $62 trillion last year. Roland Berger mapped out the net revenues as a share of AuM for several of the globe’s largest players, finding that the average has fallen by a few base points. BNY Mellon and Fidelity are according to the analysis the most profitable of the select group – partly explained by business model differences – although the first mentioned company has seen considerable margin erosion over the past six years. 

Revenue margins of asset managers

The asset management arm of JP Morgan has seen a relatively flat development, while meanwhile BlackRock, Amundi and Vanguard have all seen their net revenue fall vis a vis years back.

Healthy profits remain

Despite the pressure on revenue margins, the industry has still been able to generate relatively healthy profits, illustrating how the sector is financially well equipped to take on the challenges in the space, including digitisation, fee pressure and regulation, and using them to “reach new levels of success”, according to Mark de Jonge, a senior partner at Roland Berger and co-author of the report. Since 2010, the average profit margin of the top six asset managers has been stable at around 13 base points, with again BNY Mellon, Fidelity and JP Morgan enjoying premium performance – all three US players have seen recovery since 2015.

Likewise, the average for the target group has returned to growth, taking the profitability metric back to where it stood seven years ago. Interestingly, the data reveals that there remain significant disparities between players, the result of different business models, client groups, asset class focus, geographic focus and legacy infrastructure. 

Changing landscape

Looking ahead, the authors warn that wealth managers are set to face a sweep of change in the coming years, on top of accelerating disruption which is already taking place, mounting further pressure on strategies and operating models. New and renewed regulatory frameworks like MiFID II, which is expected to come into effect in or around January 2018,  will radically change the regulation of the European securities and derivatives markets, and in its slipstream significantly influence the investment management industry. Previous research has found that the impact of MiFID II will be large – a staggering 95% of firms surveyed in the study agreed that their business strategy will be impacted by the European regulation, meanwhile MiFID II will also impact investment firms based outside of Europe.

Average profit margin of the top asset managers

Another major trend is the changing demands of B2B clients and consumers, which are demanding greater price transparency and improved service, a development which is obliging asset managers to rethink and re-design their operations. Digital is at the forefront of the trend – digitalisation requirements from consumers are ever-growing – whilst it at the other side of the spectrum holds the key to ramping up performance and delivering to expectations. Across the consumer landscape, from the middle class wealthy to High Net Worth Indidividuals (HNWIs), with the rise of the millennials and generation X’s new attitudes and ways of thinking are emerging. A study released last year by Strategy& found that close to 70% of the younger generations think that strong digital offerings from wealth managers are important elements of service, yet, at the same time, their needs are in their view not being fully satisfied. 

De Jonge said of the results, “Clients, both B2B and B2C, have impose increasing digital requirements on assets managers. A prerequisite for assets managers is the end-to-end digitalisation of their operating model – without a digital operating model, assets managers will not be able to fulfil digital client needs.” 

Digital is also driving change in the way asset managers perform their duties – the emergence of robo-advisors is touted as the next big disruption in the industry, in sync with broader developments in the labour market which is seeing manual work losing its edge to robots and intelligent automation. Analysts forecast that by 2020, up to 6% of total invested assets could be invested using robo-advisory services, up from 1% today, lifted by the efficiency and performance gain it can bring, in particular well suited to serve the rapidly growing share of exchange traded funds (ETFs).

However, according to Sjors van der Zee, a Principal at Roland Berger and co-author of the research, “The current debate around robo-advisors unfortunately focuses on only part of the equation. Robo-advisory is capable of more than client profiling and linking this to investment models. The real opportunity behind the robo-advisor lies in the ability to link client profiles with much more sophisticated, more dynamic asset allocation models.”

Organic growth of asset managers

Against this increasingly challenging backdrop, De Jonge elaborated that asset managers typically have to be able to bear a cost-level increase of 2% to 3% per annum, although for many out there, especially those which face a below average digital maturity, the demands of the new era will expectedly add further to the cost burden. As a result, wealth managers should aim for growth of beyond 3% to stay competitive, however, Roland Berger’s analysis of ten large fund firms shows that only a few asset managers in fact managed to hit the target last year in an organic manner. “For many large managers, especially those with broad product suites and distribution channels, organic revenue and profit growth actually relies almost solely on market and currency movements”, De Jonge explained.

Interestingly, size doesn’t seem to surface as a major factor, instead it all comes down to “everything surrounding competitive advantage,” says De Jonge. “Ultimately, the determining factor for success and survival will have less to do with size and more with value-adding product offerings and distribution channels. Large players will struggle to keep up with the new demands of the industry. And without market visibility, smaller players may not be able to even survive,” Van der Zee added. 

Strategic priorities

Based on their analysis, the authors outlined several trends for managers which they believe will determine the face of the industry, and thus be key for them to capitalise on. The first is a firm’s level of exposure to the market's cyclical nature: “the asset management industry is a growth industry, but it is also cyclical. Managers should fully understand their own cyclicality and how it impacts the business, and from there take the right measures,” contended De Jonge.

The growth of ETFs in asset management

Secondly, portfolio optimisation, including finding the right asset mix in the light of rapid expansion or the next downturn, remains paramount. According to Van der Zee, “Identifying and focusing on the sweet spots of growth while radically addressing the cost base by eliminating areas with low visibility will be crucial.”

Whilst diversification as a while remains a solid strategy, the industry correctly assumes that over the long term, diversification contributes to the value and growth of investment portfolios, the approach simultaneously brings along a number of risks, including over exposure.Van der Zee added, “Unbridled diversification significantly damages the outlook for large asset managers, in particular those where clients are not captive and do not entrust the asset manager with most or all assets.”

The crux of diversification may not necessarily lie in fund performance, but in the overall implications for organisational costs, which, De Jonge also stated, go well beyond the direct costs related to the investment team. “Each division of the business chain from management to operations may be affected.” He concluded, “excessive diversification will neither drive revenue growth nor protect profitability.”

Another pitfall the authors warn for is CEO optimism, which in times of favorable fundamentals, risk delaying strategic reviews and restructuring. “Asset managers should take advantage of the tailwinds now to prepare for survival during the inevitable downturns – and ultimately to prepare for future success”, Van der Zee remarked. In the study, the authors stipulated four key recommendations for CEOs and leaders: 1) Define your competitive advantage and tailor the offering; 2) Create a competitive cost level throughout the cycle; 3) Reinforce marketing efforts; 4) Embrace digitalisation; and 5) Work with FinTechs in asset management to foster innovation.

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