The asset management industry's exceptional agility following the financial crisis, most particularly its ability to improve profitability, is masking long-term challenges to growth, according to McKinsey & Co.

In fact, the top quartile of asset management firms earned a whopping average margin of 46% in 2010. By comparison, the bottom quartile earned a mere 6% profit margin.

More importantly, McKinsey said, while assets under management in the second quarter exceeded AUM before the financial crisis of 2008, overall industry margins are 15% lower that before 2008 - due to escalating costs and ever-increasing pressure on yields.

"With the market proving unreliable in 2011 and 2012, asset managers will need to tackle the business model issues at the center of rising costs, lower prices and high variability of margins in the years ahead," McKinsey said.

"Growth has proven more elusive than profitability, with only one in five asset managers sustaining above-average growth rates over the past decade," McKinsey added.

Moreover, asset managers are not investing adequately in their businesses, McKinsey said.

"While caution is understandable in times of market volatility, the reluctance to invest in growth was evident even in 2010,  which saw double-digit cost increases, but only 2% to 3% of those increases directed toward growth," McKinsey said.

McKinsey recommended that asset managers keen on growing concentrate on:

Alternatives - which could reach 25% of all retail revenues by 2015

Retirement solutions - which McKinsey projects will deliver $2 billion in new revenues within the next four years

Exchange-traded funds - expected to expand by an additional $1.6 trillion in assets under management by 2015, reaching global AUM of $3.1 trillon

Emerging markets - comprising 35% of the world's profits by 2015 (whereas the U.S. will only account for 31% of global GDP, and other developed nations, a combined 33%).

-- This article first appeared on Money Management Executive.