The North American asset management industry has thrived the last five years—but that growth won’t continue unless managers rethink how they operate, warned a new report from McKinsey & Company.
“If costs continue to increase in parallel with the markets, the gains in assets, revenues, and profitability of the past several years could be vulnerable to a market downturn.”According to the consulting firm’s annual benchmarking study, shifts in client demand, product innovation, distribution, technology, and regulation are reshaping asset management. Traditional operating models will no longer be sufficient to succeed in the evolving industry.
In order to perform well in the coming years, asset managers will need to address several critical challenges, the report argued.
One such challenge is the growing demand for passive investments. According to the study, passive strategies captured $593 billion of net flows into the asset management industry between 2009 and 2014, while all other strategies experienced a combined $712 billion in outflows.
To combat this shift in client demand—which McKinsey attributed to a narrowing performance gap between active and passive—active managers need to focus on more specialized strategies, such as alternatives and multi-asset, which have attracted $1.6 trillion in assets over the last five years.
Additionally, McKinsey reported that asset managers will need to make use of advances in data and technology to drive innovation. These advances have “the potential to transform investment processes, making new sources of insight available to portfolio managers, and freeing up research bandwidth from routine tasks,” McKinsey said.
However, the report added, in order to become leaders in innovation, individual firms will need to work to attract employees from outside the industry with “a more diverse array of skills and talents.”
Another challenge asset managers will need to overcome is the “rising tide” of regulation. Increasing scrutiny by financial regulators regarding issues such as pricing transparency will require asset managers to “significantly step up their regulatory approach.”
“This means going beyond a reactive, compliance-driven approach to rethinking business models and product lineups in order to take advantage of opportunities created by regulatory discontinuities,” the report continued.
Other areas of focus for asset managers included a fragmenting client base, as RIAs and direct/discount brokerages attract retail assets to the asset management industry, and creating and sustaining leverage—which has been in short supply since 2009, according to the study.
“The underlying cost base of the North American asset management industry as risen almost as fast as revenues,” McKinsey explained. “If costs continue to increase in parallel with the markets, the gains in assets, revenues, and profitability of the past several years could be vulnerable to a market downturn, or just to a pause in the upward climb in asset prices managers have enjoyed for several years.”
Should North American asset managers recognize the impact of industry shifts, and take steps to overcome the resulting challenges, the next five years will offer “continued opportunities for success,” McKinsey concluded.
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