As a result, asset managers are likely to see investors’ demands grow to be ever more complex. Institutional investors will seek a combination of capital preservation, high yields and strong ESG performance. Retail demand for tailored solutions and ESG investing will grow too, along with advice and education. Asset managers will be forced to accelerate diversification, using alternatives to push up returns while making greater use of low-cost options, such as factor investing and enhanced beta.
Firms will also face a growing margin squeeze. Competition and regulation will erode fees in every asset class, and the shift to lower-margin strategies will also reduce income. 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.
EY modeling shows that these trends will have dramatic effects on profitability. The base scenario for 2021–25, which assumes AUM growth of 15% over five years, expects average operating margins to decrease by 0.8 percentage points. Most firms will see profitability fall faster than this, due to the accelerating “winner takes all” phenomenon. That will make it hard for many asset managers –especially small- and medium-sized firms without a demonstrable source of differentiation – to survive in their current form. Furthermore, EY modeling shows that a pessimistic scenario (with a market correction holding AUM flat over the next five years) would lead to a 7.3 percentage point reduction in average operating margins by 2025.
Asset managers need to make significant changes to their strategies and business models if they’re to succeed in this increasingly fluid and challenging environment. Firms must pursue multiple avenues of growth; invest heavily in data and technology; and take a flexible approach to partnering, collaboration and mergers. There is also an opportunity for firms to offset margin dilution by taking action on strategic cost transformation.