Asset management firms recorded average profitability of 28% through 2010 and the first half of 2011, according to a new McKinsey report.

But firms need to make a few adjustments to attain above-average, sustainable growth. Before firms can achieve that, they need convictions, based on solid foundations, to make the necessary investments in their firms. McKinsey developed seven predictions, based on its research, to assist firms deciding how to commit resources toward profitable expansion.

Independent asset management firms will control two-thirds of industry AUM by 2015, McKinsey predicted. Troubled banks and insurance companies will divest their captive asset management divisions to meet tighter capital reserve requirements under Basel II and Solvency II, respectively. Also, compensation practices at banks and insurance firms will make it harder for them to recruit capable managers.

In addition, the gap between bank and insurer valuations, on the one hand, and those of asset management firms on the other, will make it harder for banks and insurers to compete for beneficial deals, McKinsey said.

Over the next four to five years, alternative products will go mainstream as retail investors look for ways to cope with volatile markets and underfunded retirement savings portfolios. Alternatives now account for 8% of total U.S. retail fund assets. That ratio should increase to 13% by 2015, and alternative assets as a portion of revenues will be 25%, McKinsey predicted.

Most asset managers have not yet adjusted their sales, compensation and incentive structures to meet this opportunity, according to the report, “Growth in a Time of Uncertainty: The Asset Management Industry in 2015.”  

Alternative products are just one slice of an even bigger business opportunity, which is retirement savings. If the low-interest rate environment persists, the industry will need products that deliver more income to reach their target-retirement dates. Also, a massive amount of IRA rollovers — $400 billion in net flows over the next five years — will represent the biggest net flow opportunity in asset management.

ETF holdings stand at $1.5 trillion globally. McKinsey estimates that more than $1.6 trillion of new money will enter into ETFs by 2015, raising global ETF holdings to more than $3.1 trillion. Asset management firms need to appreciate the magnitude of ETFs’ competitive strength, and play smart defense. That includes offering actively managed ETFs and other similar products, McKinsey said in the report.

The portion of global AUM based in the U.S. and other developed markets will likely continue to shrink, for a couple of simple yet powerful reasons, McKinsey predicted. Savings rates in developing markets may continue to outpace rates in established places. Meanwhile, investable assets will tend to shift out of the U.S. to global markets, as U.S. investors search for products with higher returns and diversification.

By 2015, the emerging markets asset management industry will likely increase its share of global AUM and achieve the largest share of global profits — 35% — for the first time, according to a McKinsey spokeswoman. By that time, McKinsey predicted, the U.S. will account for 31% of global profits and other developed markets will contribute 33%.

It is fine to budget for product sales and marketing, but firms need a firmer grasp of how the increase in that type of spending actually impacts sales. By 2015, according to McKinsey’s forecast, firms will bring investment-like discipline to their sales and marketing efforts. Regardless of the approach, asset management firms will take a closer look at sales and restructure sales force operations to boost returns.

Firms will have to cut costs by as much as 30% to keep the cost of doing business at an optimum level. Specifically, firms that commit to being top performers will look at maturing businesses, such as mutual funds and operations in developed markets, to find ways to bring down costs, according to McKinsey’s forecast.