The global asset management industry consists of two businesses – one serving ‘professional’ clients (whether institutional or retail) and the other serving ‘non-professional’ clients. Customer needs and the business models are so fundamentally different that the industry will restructure around these segments, rather than the traditional institutional vs. retail split. Or so says a report by consultants Mercer Oliver Wyman and Lazard.
In the ‘non-professional’ segment, scale and brand, rather than performance, will be the main drivers of success, leading to consolidation among providers, predicts Oliver Wyman. In contrast, performance will be the main differentiator in the ‘professional’ segment, leading to even greater fragmentation. The report finds that scale and performance are incompatible within the same business model, and that, as a result, these two business models need to be managed separately going forward.
“We see successful asset managers making a clear separation between the ‘professional’ and ‘non-professional’ segments,” says Julia Hobart, a director at Mercer Oliver Wyman. “Different client needs require quite different business models, and few asset managers will be able to manage both simultaneously. Most large firms today are a blend of the two. This is unsustainable. This new segmentation, even if not well understood by the market, explains the simultaneous consolidation and fragmentation occurring in the industry and casts doubt on strategies being adopted by all but the most sophisticated competitors.”
The report identifies four types of business models that will characterise the successful asset managers of the future:
A small number of advantaged consolidators; scale managers with strong brand focussing on the ‘non-professional’ segment.
A large number of streamlined managers embedded within banks and insurers; these players will efficiently support distribution by focusing on a core product set, selectively outsourcing processing components and buying-in third-party specialist products.
A large number of specialist boutiques; small, manager-owned investment houses who can generate performance, focussing on the ‘professional’ segment.
Only a few Alpha platform providers; large organisations built around autonomous investment teams replicating boutique organisation and performance, but also capturing the benefits of shared services.
“Management will need to decide which customer segments they wish to serve and tailor their business model accordingly,” adds Imran Gulamhuseinwala, a consultant at Mercer Oliver Wyman and an author of the report. “Mixing the models will risk not succeeding in either.”
The report’s other main findings include:
Asset management is poorly understood and valued by the market, partly because the quoted monoclines are few (with just over 5% of global revenues) and unrepresentative of the industry as a whole.
Retail assets under management (AUM) globally grew at 10%-11% pa over the last decade, and now account for $26 trillion, 55% of the total AUM. Institutional AUM grew at a slightly slower rate of 9%-10% per annum – however, margins also declined at a slower rate of about 1% a year.
Revenues over the cycle grew at 7%-8% pa, which was comparable to wholesale banking and brokerage, however the volatility of asset management revenues was 40% lower. The current geographical breakdown of revenues for the industry is 47% North America, 34% Europe and 19% Rest of World.
Earnings growth failed to match revenue growth, exhibiting 4%-5% a year growth over the decade, as operating margins fell from 32% to 23%. Underlying compensation, administrative and IT costs rose, thereby eliminating economies of scale.
8-10% of the industry’s back and middle office is now outsourced, up from 1-2% in 1993. Outsourcing may be the long term solution for many of the embedded asset managers but is unlikely to be a solution for the consolidators; these firms should be focusing on building scale in middle and back office services.
The trend toward full open architecture will slow as most banks and insurers with embedded asset managers will realise more value by streamlining their production capability rather than offering the complete set of competing funds.
Historically, says Oliver Wyman, client segmentation has been based on a split between institutional, retail and high net worth (HNW) client segments. “The result has been overlapping service requirements resulting in confusion over client needs and poor alignment of costs to revenues,” says the firm. “In the future, asset managers will reorganise around customer segments characterised by the professionalisation of clients. ‘Non-professional’ clients have limited financial training and are motivated by complex, often non-investment related factors; they are sold investment products. ‘Professional’ clients have a good understanding of their own requirements and finance theory; they buy investment products.”