There’s a shift of power happening in the asset and wealth management industry: retail fees are falling, institutions are dissecting alpha and beta, with beta being commoditized, and millennials are showing a preference for non-traditional wealth management. This is creating a buyers’ market and pushing down fees for asset managers and wealth managers alike. This shift will lead to many innovative outcome-based solutions for investors as well as a need for wealth managers to protect profitability. Asset and wealth managers need to act now and keep pace with the rapidly evolving industry if they want to maintain margins.
Regulations being introduced worldwide that prevent asset managers from paying commissions to incentivize distributors are altering industry economics. With a focus on fee transparency, these regulations are promoting a shift to lower-cost fund products and reducing asset and wealth managers’ revenues. The biggest asset and wealth managers will face broad and substantial revenue pressures, and we’re already seeing substantive price reductions particularly among those catering to the mass affluent. This will also drive far greater specialization, as managers seek to differentiate themselves from their competitors by offering focused active products targeting higher returns, though at higher risk, over a longer time horizon at higher prices. With increased competition and as pressures increase for the industry to act in their clients’ best interests, asset managers must develop a clear strategy across the passive/active spectrum.
The proliferation of indices and the evolution of smart beta investing have given institutional investors the tools to customize portfolios to their clients’ needs, all for a lower price. A razor-sharp focus on fees has permeated all asset classes, and passive investing is making further inroads into active management, including hedge funds. Yet there are alternative strategies where unique skills, knowledge and infrastructure do create alpha. Investors value this and are willing to pay for it.
Millennial preferences around convenience and investment models and their general skepticism about traditional finance will drive change. This generation will increasingly turn to automated wealth management solutions, that incorporate automated asset allocation, outcome-based planning and automated processes, such as new client onboarding.
The pressures and challenges asset managers face are both changing and intensifying. Regulations are changing industry economics, with low-cost products gaining market share and larger players benefiting from scale economies. Asset and wealth managers must be fit for growth, or they can expect to fail or to become acquisition targets.
We recommend taking a laser-like focus on designing strategy around the investor. Visionary leaders who recognize the significant opportunity to enhance their understanding of their customers and the changing product distribution landscape will not only weather the buyers’ market but will turn it into an enduring competitive advantage.
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