Money managers are finding it increasingly challenging to produce profits as fees decline for both active and passive fund strategies, a global report shows.
Operating margins for publicly traded asset management companies fell to an average of 29% last year, the lowest since 2011, according to the report published Thursday by Casey Quirk, a business of Deloitte. Margins dropped by an average of 5.2% annually over the past three years, even as assets rose at a 6.9% rate.
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“Though many asset managers are talking now about cost-cutting, over the past few years we’ve seen most asset managers actually reinvesting in their businesses,” said Amanda Walters, senior manager at Casey Quirk. “That comes at a cost and both the cost rising and the fee compression is putting a lot of pressure on those margins, even though assets are rising due to capital appreciation.”
Managers are embroiled in a fee war as investors gravitate toward lower-cost funds such as those tracking indexes. To keep some of their expenses in check, firms including State Street, BlackRock and Legg Mason have announced job-cut plans this year.
Higher costs are most attributable to technology spending, such as investing in artificial intelligence, Walters said.
Margins are down from a post-financial crisis high of 34% in 2015, according to Casey Quirk. The margin decline implies $29 billion of unrealized profits for the global investment management industry — including closely held as well as public firms — over the past three years.
