Burdensome regulation costs and the prospect of potentially even more scrutiny continues to frustrate asset managers, but new management strategies and the continued growth of ETFs have proven to be bright spots for the industry.
While still miniscule in comparison to mutual funds for overall market share, ETFs have rapidly become the go-to investment vehicle for even institutional investors. A recent survey from the Financial Planning Association, found advisors are now recommending ETFs above mutual funds - nearly 81% of all advisors in the survey say they either used or recommended ETFs to their clients, versus 78% that did the same for mutual funds.
Asset managers have seen client assets continue to rise, topping $68 trillion and surpassing their pre-financial crisis numbers, according to the Boston Consulting Group. AUM is up nearly 11% from $61 trillion in 2012, the firm says. By comparison, overall AUM was $54.7 trillion in 2007.
More growth is expected in the years ahead. Global AUM is expected to top more than $100 trillion in the next five years, according to PwC Funds.
But growth gains will be eroded by increased regulatory costs, says Matt Forstenhausler, partner at Ernst & Young, who expects many managers will feed more money into their compliance activities. "There is an increased reliance on the work of the chief compliance officer with the changes the Office of Compliance Inspections and Examinations has made," Forstenhausler says, referring to a recent federal data reporting proposal.
"Not all of these costs are passed onto investors, and this is eating into asset manager profits."
If you ask any asset manager what is on the forefront of their mind in 2015, they will most likely say the SEC.
In the last month, the agency has introduced a proposal requiring new monthly and annual "census-like" reporting forms, a move that has come as no surprise to managers. "Investors will have better quality and greater access to information about their fund investments and investment advisers," SEC Chair Mary Jo White said in a statement.
The Financial Stability Board has also introduced a new regulatory proposal aimed at mitigating risk, which would hold funds over a yet-to-be-determined size to tighter reporting scrutiny.
Firms like BlackRock and Vanguard have already come out against the proposal, Bloomberg reports. Vanguard's CIO Tim Buckley and risk management head John Hollyer wrote a letter to the FSB board expressing their disappointment.
"If bank-like prudential regulations were applied to mutual funds and investment advisers, they would not only be extremely ill-suited to limit systemic risk, but they would also threaten to disrupt the capital markets and drive up the costs of investing for millions of investors saving for college, retirement, and other long-term goals," they wrote to the FSB.
In response to regulatory proposals, Jerry Szilagyi, CEO of Catalyst Funds in New York, says his firm has already started bringing more of their compliance in-house to leverage resources.
"It certainly puts pressures on the economics of the business and hinders growth in some ways," Szilagyi says. "The more resources that you spend on just some of the compliance and regulatory issues, the fewer resources you spend on actually managing the business and providing services to clients."
With the decreasing costs of fund products, Szilagyi says Catalyst has seen their distribution on the rise. "That has caused us to migrate towards higher value added and actively managed types of strategies where you can still justify a higher fee for those services," he explains.
Low fees have contributed to ETFs in the U.S. reaching $2.1 trillion in combined assets, up 21.2% since April 2014, according to the Investment Company Institute. Total assets in domestic equity ETFs increased $200 billion in the last year, while global ETF assets went up nearly $106 billion, ICI says.
Despite the recent wave of regulatory proposals and increased back office compliance costs, Szilagyi says there is a lot to be hopeful with new innovations in alternative strategies making their way into the retail investment marketplace.
Exchange traded products have evolved from the basic ETF and exchange traded notes to active, passive and hybrids of mutual funds.
"There's a lot of evolution going on in the structure of that type of business," Szilagyi says.
Looking forward, Szilagyi anticipates a further "expansion in alternative types of investments, non-correlated, that provide some solid risk management."
Mutual fund assets reached record highs last year, according to Ernst & Young researchers.
This, researchers say, is due primarily to capital appreciation in equity and balanced or mixed fund categories. According to ICI, total net assets of mutual funds in 2015 topped $16.2 trillion, up from $15.2 trillion this time last year.
Long term funds, including equity, hybrid and bonds, saw a net inflow of $5.63 billion last month, compared to $14.5 billion in inflows for March, ICI says.
Equity funds recorded outflows of $1.38 billion in April, versus inflows of $5.05 billion in March, the agency reports.
Meanwhile world equity funds posted inflows of $18.25 billion in April, while U.S.-invested funds had an outflow of $19.63 billion, up significantly from $8.78 billion in March, ICI says. The liquidity ratio of equity funds was at 3.4% compared to 3.5% in March, according to ICI.
Jim Danaher, the managing director of Defined Contribution Solutions at Northern Trust, says even with digital innovations in the coming years, asset managers will always play a vital role.
"Having plan participants assess levels of risk is probably still a little more than many people can do, but targeting a retirement time horizon, that's something I think we can understand."