Mutual fund outlook: The time to act is now

The stock market is booming—and leading mutual fund managers are worried. Here’s why.

US mutual fund firms face substantial challenges, including fee pressures, shrinking distribution platforms, intense competition for talent and more. To compete in the coming years, firms will have to capitalize on emerging opportunities to offer new products and fee structures, use technology to cut costs and boost performance and find innovative ways to deliver value to investors.

What we expect to see by 2025 for US mutual funds

loading-player

Playback of this video is not currently available

Many of the factors reshaping the global fund landscape are having a larger impact on US firms.

Buyers are demanding lower fees. They’re turning toward passive funds faster than ever. And the flow of new funds into the market is slowing. All of this translates to increasing pressure on US mutual fund firms.

The industry is now increasingly driven by technology, in both the front and back office. Firms have a choice: they can invest in technology and recruit and train tech-savvy talent, or they can outsource certain functions to gain access to the most current technologies and talent.

The industry has ridden the wave of market appreciation over the last several years. Operating margins have returned to levels seen before the global financial crisis, and asset growth has been strong. But fees are declining rapidly, and cost pressures are rising. It’s now a buyer’s market, with investors and regulators demanding lower fees and more transparency. For the US mutual fund industry, the pressure is rising.

To succeed in this challenging environment, US mutual fund firms will need to focus on their strategic positioning, provide value for money, implement integrated data driven technology platforms and develop strong talent programs to stay competitive as the industry moves toward 2025.

“Change is the only constant. The pace of change in the US mutual fund industry continues to accelerate, creating new challenges and opportunities for managers.”

Peter Finnerty,US Mutual Fund Leader

The changing landscape

The US mutual fund industry has been lulled into a false sense of security over the past decade. Assets under management (AUM) have grown substantially, making it relatively easy for many US mutual fund firms to sustain profits. However, a slowing of AUM growth and an industry-wide move to lower fees, driven in part by a surge in the popularity of low-cost passive products, are shrinking fund firms’ revenues. In addition, investors are demanding more value for their dollars and regulators are demanding more transparency. The industry is at a critical juncture.

The shift toward passive management

Investors have been moving into low-fee passive products, putting more downward pressure on fees and dampening the revenue outlook for US mutual fund managers. Many mutual fund firms still employ active management, but passive management is gaining ground rapidly—far faster than earlier anticipated—buoyed by record equity market performance. Institutional investors continue to surge into passive strategies, due in part to the transparency and low fees these products offer and the inability for many asset managers to consistently outperform their respective benchmarks.

Declining US mutual fund expense ratios

Based on PwC analysis, we believe total expense ratios (TERs) for both active and passive funds will continue declining through 2025. By 2025, we expect combined active and passive fund expense ratios to decline by approximately 22% from their already low levels in 2018. Price remains a key differentiating factor (along with performance) among market cap-weighted passive products, driving fees—and TERs—ever lower.

Given the tremendous pressure on management fees and TERs, the revenue outlook for US mutual fund firms as we head toward 2025 is not promising, particularly for active managers. Mutual fund managers will have to work harder to maintain profits and stay competitive.

Responding to the changing landscape: A four-part agenda

Strategic positioning

Mutual fund managers will need to decide how they plan to play in this space—what products to offer, what markets and distribution channels to use and whether they are a scale or niche player.

Many will have to evaluate their sourcing strategies and decide which functions are core and should be retained in-house and which would be better outsourced. By outsourcing certain functions, firms can focus on their core competencies, achieve scale, enhance labor specialization and deliver more value to clients.

In many cases, it’s faster, simpler and cheaper to outsource some or all of a function, depending on whether the activities involved are considered strategic. Outsourcing can alleviate the burden of keeping technology up to date. For instance, it may be more cost-effective for third-party fund administrators to invest in the latest technologies, as they have greater scale than fund firms currently performing services internally.

Technology transformation

Transformation and automation are key for mutual fund managers to increase efficiency, lower costs and provide a better client experience. By 2025, we expect the front, middle, and back office to be replaced by a single, integrated platform that has been transformed by technology. Blockchain, AI and robotic process automation (RPA), for example, are expected to be able to handle most data maintenance and reporting requirements, from counterparty exposure reporting to fund administration.

Firms looking to create an integrated platform have two options. One is to build or buy the core technology capabilities and keep them in-house, the other to adopt a multi-platform, cloud-based solution with managers outsourcing some operations to service providers. Regardless of the approach a firm chooses, having access to the right high-quality data will be essential. Firms should ensure that they develop reliable, consistent and quality data to feed into their systems and to support sound analysis and decision making.

Value for money

As pricing pressure intensifies, firms should look for creative ways to price their products to satisfy investor demand for value. Aligning fees with performance may help, but managers must work to understand what else constitutes “value” in the minds of investors.

Market leaders have already introduced performance-linked or fulcrum fee structures. Currently, fulcrum fees account for just a minor portion of US registered funds. However, we expect new fee models will continue to develop in the coming years.

Today’s investors have access to more data and tools to help them analyze and compare fees and performance, yet standard asset management fee models have remained static. In the coming years, the asset and wealth management industry will need to lower costs, manage fee pressure and learn to deliver more for less.

Battle for talent

The US mutual fund workforce is evolving and shrinking as we move toward 2025. Rapid developments in technology have changed the employee profile and the number of jobs needed. Robotics and AI now handle repeatable, transactional tasks that were once performed manually. Functions such as finance and operations are being disrupted, while areas such as analytics, cybersecurity and vendor management are seeing growing demand. New roles are emerging as well, in areas ranging from ethics to stockholder relations.

Despite pressures on profitability, investments in top talent are essential to ensure the ability to transform firms and drive success. As technology becomes more central to fund managers, talent needs will change. Mutual fund firms are competing with large technology companies and startups for skilled workers. Data science is becoming a more crucial skill, and teams that can successfully develop and integrate cloud-based technologies are fundamental for the future. Firms that build diverse and inclusive workspaces will reap the rewards.

Contact us

Peter Finnerty

Mutual Funds Leader, PwC US

Thomas J. Holly

Asset and Wealth Management Leader, PwC US

Tracey Keevan

Mutual Fund Tax Technology Leader, PwC US

Declan Byrne

Mutual Fund Research & Analytics Leader, PwC US

Mark Israel

Mutual Fund Advisory Leader, PwC US

Mike Spiryda

Mutual Fund Tax Leader, PwC US

Follow us