The investment management industry is poised for a major overhaul in the next three years, as asset managers are opting to retool their business models.
According to a new survey conducted by Pricewaterhouse Coopers, major players in the asset management business are seeking to map out new game plans for increasing profitability amid pressure from competing agendas, battered investor confidence and heightened regulatory standards.
Among U.S. investment managers, legal and regulatory issues have emerged as the most significant business challenge and actions taken by securities regulators are likely to have rippling effects worldwide, the New York-based firm said. The poll showed that 83% of the respondents identified that issue as their No. 1 concern, followed by market performance and evolving client needs, coming in at 67% apiece.
Roughly half of the participants expect up to a 30% reduction in the number of funds over the next five years due to consolidation and operational inefficiencies. Consolidation and a ramp-up in offshore outsourcing will likely result in a shrinking workforce within the industry, the survey said. The findings are based on a global survey of more than 70 investment managers, representing more than $5.6 trillion in assets.
Other key findings of the survey include firms shifting their focus from outward expansion to organic growth, operational efficiencies and profitability in their core competencies. Additionally, funds and distributors will look to tighten up channels and form fewer but stronger relationships.
Respondents also said that a business model supporting tighter integration with fewer distributors and vendors should offer a higher profit potential. In that type of a cooperative environment, there will be a premium on those firms that can build successful integrated relationships along the entire value chain, maximizing profit margins along the way. Distributors with duplicate networks will have a competitive edge and increasing influence over funds.
"Assets under management has long been the industry yardstick, but it becomes less meaningful in a highly segmented, highly interdependent market where profitability is the main focus," said Chip Voneiff, a partner at Pricewaterhouse Coopers. "Firms should be asking themselves if they are equipped and have the information they need to measure, aggregate and maximize profitability by product, partner and customer."