Asset managers have come a long way since the financial crisis to earn back a significant amount of the revenue and earnings lost since the fourth quarter of 2007.

But the sector still faces strong headwinds to a solid recovery, including frugal investors, a drastically altered distribution landscape and several regulatory changes that could constrain its business, Moody’s Investors Service said in a recent outlook of the industry that was released last week.

Despite the progress, the New York City-based rating agency said it maintains a negative outlook on the sector.

Through the fourth quarter, the sector was giving off mixed signals about its recovery. Revenues at asset management firms had recovered to 82% of where they were in the fourth quarter of 2007, and the sector’s earnings before interest, taxes, depreciation and amortization were just 74% of the fourth quarter 2007 level, the rating agency said.

In late 2007, the markets and the sector were approaching performance peaks, after a long period of achieving high levels of earnings, said Dagmar Silva, a vice president and senior analyst at Moody’s.

“They are the old norm,” Dagmar said of fourth quarter 2007 levels. “We’ve all gone through this crisis and learned to what extent the norm was being supported by lower interest rates and other factors.”

But institutional and retail investors have been steadily gravitating toward passively managed investments, like exchange-traded funds, which will undercut the firms’ ability to generate traditional forms of fee revenue. That will make a full recovery tougher to achieve for the sector.

Making matters worse is the game of musical chairs going on at brokerage firms, banks and other traditional distribution channels for investment products, according to Moody’s. The number of major wirehouse firms has shrunk from seven to three, meaning that there are fewer platforms from which asset managers can serve advisors.

“Those three firms have leveraged greater control over [product] distribution,” said Rory Callagy, an assistant vice president at Moody’s. “It could essentially reduce asset manager fees.”

Silva said that it also means that wirehouse firms are discriminating among asset management firms, based on performance.

Consolidating wirehouse firms are exerting influence over asset management firms, but the advisor market itself is becoming more fragmented as more professionals move from brokerages to the independent channel. “

Advisors need a high-tech, low-touch communications strategy,” Callagy said. “That makes it harder for the asset management firms to touch the large amount of advisors.”

And there is an array of potential federal regulations that could constrain the way asset managers do business, not the least of which are discussions to require that all financial advisors operate under the fiduciary standard when dispensing advice to clients. True enough, the imposition of that standard might lead to more open talks between asset managers and their clients about the risks associated with certain investment products, Silva said. But it might also affect some of the choices that asset managers make.