The asset management industry felt the ground shift under its feet during the recent financial crisis, but signs of resiliency persist, according to a new benchmarking study by the McKinsey & Co. consulting firm.
First, some tough realities. The average industry operating margin ended last year at 22%, plunging one-third from the high of 33% in 2007. As a group, asset managers will come under pricing and competitive pressures from leading financial advisory companies like Charles Schwab Corp., Fidelity Investments, Morgan Stanley Smith Barney, Bank of America/Merrill Lynch and Wells Fargo & Co. — which collectively controlled roughly 55% of U.S. household assets in 2009, up from 40% five years earlier.
"Clearly they have stronger bargaining power, and we believe they have not yet applied that to the marketplace," said Pooneh Baghai, a director at McKinsey & Co. When the leading advisory firms decide to exert that influence, they could extract as much as 10% in pricing concessions from the asset managers.
Most retail asset managers in the survey, 88%, said they believe Schwab and other distributors will capture an increasing share of asset management revenue in the next two or three years.
This would bridge the profit-margin gap that exists between the two businesses. In their strongest years, some of the leading brokerage firms earned a 21% margin. In the asset management industry's worst year, it earned 22%.
"It is a terrific time to be an adviser," Baghai said. "The best firms are coming to you with more focused service and product propositions, and you will have a lot of choice. The challenge is figuring out with whom you want to partner."
McKinsey & Co., with offices in 40 countries, surveyed 110 companies with an aggregate $9 trillion-plus of assets under management, or more than 40% of the industry's total and more than half of the actively managed portfolios.
Asset management firms, however, are finding several ways to maintain profitability.
Companies found ways to cut costs by an average of 6%, which helped margins. They looked at their cost bases and farmed out functions that were not core to their operations, such as customer service and transfer agency work, Baghai said.
They culled their product offerings, in some cases focusing on equities.
In particular, McKinsey identified three winning post-crisis business models. They were the at-scale firms, companies that manage an average of $300 million; multiboutiques; and niche specialists. At-scale specialists boosted market share from 27% to 35%. Survey respondents that successfully retooled their business models have become product specialists, rather than trying unsuccessfully to offer something in all asset classes, Baghai said.
"This is no longer an industry where a rising tide lifts all boats," she said. "Unlike past decades, where you could select across all of these [asset classes], asset managers need to make deliberate choices about where to focus and how much to invest to drive growth."
Even as specialists gain ground, however, large companies with the resources to compete across many asset classes will remain extraordinarily profitable, Baghai said.