2011 was a tumultuous year, one that left most industry executives deeply uncertain about the future. The following predictions are meant to provide the industry with 10 key insights that should help clarify some of these uncertainties.
Overall Industry Trends:
- Profit margins will slightly decline as a result of sideways markets and increase fee pressure from large distributors. With Europe continuing to grapple with economic upheaval and quite possibly sliding into recession, as well as continued economic challenges in the US, markets will not provide any support for increased margins. A number of distributors, including Morgan Stanley, have started or continued to increase fees for funds distributed through their brokerage platforms. We anticipate this approach from a majority of large broker dealers as they struggle to operate with margins that are less than half of those in the asset management industry. Based on our analysis of publicly available asset managers, kasina predicts that 2012 operating margins will dip from 30.5% to 29%.
- M&A activity will increase as European banks face pressure to raise capital in order to meet the requirements of Basel III. Some European banks with large capital shortfalls -- including Societe Generale, Deutsche Bank, BNP Paribas, UBS, ING, and others -- will likely need to make serious capital divestitures to avoid FSB surcharges. We anticipate that at least three European banks will put their US asset management arms on the auction block in 2012 to raise capital. This will further consolidate assets among the top fund families, but also provide mid size or insurance players to gain the necessary scale to compete in the US market.
- Investors will also replace core U.S. equity mutual funds with equivalent ETF strategies. At least one of the large US players will add ETFs to their product lineup to diversify their offerings. Advisors will continue to be frustrated with active U.S. equity funds, which fail to produce significant alpha to offset higher fees. Core U.S. equity mutual fund strategies will see significant fund outflows (>$35BN) while core U.S. equity ETF strategies will see significant inflows (>$25BN).
- In 2011, the increased demand for alternative funds was not matched by product development trends. Only 12% of new fund launches were in alternatives. But as distributors (both home offices and advisors) start to demand more products that better mitigate risk or provide higher returns, many more asset managers will make alternatives a major strategic focus. Based on historical trends and heightened demand, we expect alternatives to represent roughly 18% of new fund launches in the coming year.
- Insurers are poised to grow and seek out new business opportunities. In 2012, insurers will focus on restructuring their business and investing heavily in asset management. Insurers will seek out further investments in their asset management businesses (i.e. John Hancock), acquire mutual fund firms from European banks looking to raise capital, and lastly create new forms of guaranteed products in partnerships with asset managers. This means greater competition in the asset management space from firms that are well capitalized and have experience selling to financial intermediaries.
Distribution Strategy Trends:
- Gaining scale in Distribution will be the theme for the year. In 2011, 58% of asset managers and insurers used hybrids. That number will increase to 65% next year as more firms realize that hybrids can, on average, produce over 80% of the gross sales of externals at just 40% of the cost. In addition, we will see at least 15% of firms go beyond a 1 to 1 coverage model by adding internal wholesalers.
- Firms will become more effective through segmentation. Going beyond today's simplistic A-B-C approaches, 8 out of the top 20 asset managers will have sophisticated strategies to segment their advisors. These approaches will be based on a calculation of future value potential to determine WHO to interact with, along with a review of advisor preferences and behavior to determine HOW to interact.
- Traditional wholesaling leaves most advisors untouched. A mid-size firm can typically reach only 5% of the 300,000 US financial advisors. While firms need to segment and prioritize wholesaler interaction to make sure they reach the right 5% of advisors, that still leaves over 286K advisors with valuable potential assets beyond the firm's grasp. In 2012, over a dozen firms will have developed a strategy to use the Web to sell to advisors who are not covered by wholesalers.
- In 2011, 69.9% of financial advisors used mobile devices to access business content, and advisors are spending more time on mobile platforms than ever before. To meet the demand for mobile access and increase productivity, at least 50% of the top 25 asset management firms will rollout tablets to their wholesalers. A few leading firms will join the ranks of JPMorgan to develop enterprise apps for field wholesalers.
- All four wirehouses will announce policies to give advisors access to social media tools in some capacity. Pressure will come from advisors who demand it as a business necessity. Broker/dealers need to stay competitive with what they are offering their advisors. Advisor usage of social technologies is inevitable, and in 2012 we will see the continued adoption of social media as a platform to engage and interact with advisors.