The asset management industry saw the ground shift under its feet during the recent financial crisis, but there are still plenty of signs of resiliency, according to a new benchmarking study from consulting firm McKinsey & Co.
First, some tough realities. Average industry operating margins ended the year at 22%, plunging one-third from its high of 33% in 2007. As a group, asset managers will also come under pricing and competitive pressures from leading financial advisory firms—like Charles Schwab [SCHW], Fidelity Investments, Morgan Stanley Smith Barney [MS], Bank of America/Merrill Lynch [BAC], and Wells Fargo [WFC]—which collectively controlled roughly 55% of U.S. household assets in 2009, up from 40% five years ago.
“Clearly they have stronger bargaining power, and we believe they have not yet applied that to the marketplace,” said Pooneh Baghai, a director at McKinsey & Co. When the leading advisory firms decide to exert that influence, they could extract as much as 10% in pricing concessions from the asset managers. Almost all of the retail asset managers that were surveyed, 88%, said they believe Schwab and other so-called distributors will capture an increased share of asset management revenues over the next two or three years.
That would bridge the profit margin gap that exists between the two businesses. In their strongest years, some of the leading brokerage firms earned a 21% margin. The worst year for the asset management industry, the group earned a 22% margin.
“It is a terrific time to be an advisor,” Baghai said. “The best firms are coming to you with more focused service and product propositions, and you will have a lot of choice. The challenge is figuring out with whom you want to partner.”
McKinsey & Co., with offices in 40 countries, surveyed 110 firms with more than $9 trillion in assets under management, which represents more than 40% of the industry and over half of the actively managed universe.
Asset management firms, however, are finding several ways to maintain profitability. Firms found ways to cut costs by an average of 6%, which helped those margins. They looked at their cost bases and farmed out functions that were not core to their operations, like customer service and transfer agency work, Baghai said. They culled their product offerings, in some cases focusing on equities.
In particular, McKinsey identified three winning business models post-crisis. They were the at-scale firms, which are companies with an average AUM of $300 million, multi-boutiques and niche specialists. Further, at-scale specialists increased their market share from 27% to 35%.
Survey respondents that were successful in retooling their business models have become product specialists, rather than trying unsuccessfully to have representation in all asset classes, Baghai said. “This is no longer an industry where a rising tide lifts all boats,” she said. “Unlike past decades, where you could select across all of these [asset classes], asset managers need to make deliberate choices about where to focus, and how much to invest to drive growth.”
Even as specialists gain ground, however, large firms with the resources to compete across many different asset classes will still be extraordinarily profitable, Baghai said.