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 industry outlook.

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,” Silva 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.”

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