EY has released our latest global analysis on the future of the asset management sector. The study uses proprietary EY data modelling to determine the likely outlook for the sector.
The analysis shows that the next five years will be much tougher for asset managers than the past five, with firms experiencing potentially dramatic effects on profitability.
The global report shows that the COVID-19 pandemic has added to the structural pressures that have been driving the industry toward an inflection point.
EY’s analysis of asset management in future
The next five years will see change accelerated, pushing firms to do more with less.
Competition and regulation will erode fees in every asset class, and the shift to lower-margin strategies will also reduce income.
Economic and demographic factors may reduce net inflows from historic levels of 3%–4% to around 2% per annum. The need to invest in new products and tech will push spending.
Our base scenario for 2021–25, which assumes AUM growth of 15% over this period, expects average operating margins to decrease by 0.8 percentage points.
Most firms will see profitability fall faster than this, due to the accelerating ‘winner takes all’ phenomena, which will make it especially hard for small and medium sized firms to survive.
Our pessimistic scenario, which assumes flat AUM over the next five years, would lead to a 7.3 percentage point reduction in average operating margins by 2025.
In this scenario, asset managers would need to take out 10.3% of total costs over the period 2021–25 in order to maintain operating margins at 2020 levels.
Even in our optimistic scenario, which assumes AUM growth of 30% over the same period, average profitability only grows by four percentage points.
Asset managers will need to prioritise these areas
Transform business models
make strategic decisions about where to play and how to win and invest in the tech and operational infrastructure to achieve this quickly and efficiently.
EY research suggests that a typical mid-tier asset manager with AUM in the US$500b to US$1t range and a total expense base in the region of US$2b could achieve costs savings of up to 15% from a multiyear, enterprise-wide transformation program.
Realign their business around the client
Focus on the end investor, and pivot from being product provider to becoming a solutions partner.
Invest in digital transformation
Effective use of technology such as AI and automation can help to build more effective, efficient fund propositions in areas such as smart beta or factor investing.
Explore new areas of growth
Areas of growth include alternative investments, including private markets and infrastructure, and sustainable investing.
Leverage inorganic opportunities
Make use of M&A to help meet strategic growth objectives. In Australia, consolidation, rationalisation and new market entrants are likely to significantly change the competitive landscape.
Rita Da Silva is EY’s Oceania Wealth and Asset Management Leader. Rita has extensive experience and industry knowledge from serving leading financial services organisations across the wealth and asset management value chain in audit, regulatory compliance, advisory roles and transaction support.