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.
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.”
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.
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.
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.
Mutual Funds Leader, PwC US
Thomas J. Holly
Asset and Wealth Management Leader, PwC US
Mutual Fund Tax Technology Leader, PwC US
Mutual Fund Research & Analytics Leader, PwC US
Mutual Fund Advisory Leader, PwC US
Mutual Fund Tax Leader, PwC US