After going gangbusters for much of the 1990s, the asset management industry is entering a more difficult phase, according to Goldman, Sachs & Co.
In a white paper released Thursday, Goldman warns investment management firms to act now-while times are good-to prepare for what it says will be a much more challenging future.
It urges them to build scale, distribution, and their brands to compete more effectively as a shift in demographics slows the flow of money into funds. The firm also warns asset managers to develop their marketing savvy as consumers replace institutions as the driving force behind the business.
"Now is the time to build the brand," said Richard K. Strauss, an asset management industry analyst at Goldman. "There's still a few years left."
By 2006, the first wave of baby boomers will retire and begin to spend, rather than save, Goldman said.
At the same time, 401(k) and defined contribution plans will replace traditional pensions, forcing asset managers accustomed to dealing with a few institutions to serve a mass of consumers instead.
"Time is running out for those that want to be in a leadership position," said Milton Berlinski, the Goldman managing director who heads its asset management investment banking practice.
Goldman's message has not been lost on banks, which have been aggressive acquirers of asset management firms in recent years. Mellon Bank Corp., First Union Corp., and Fleet Financial Group have all bought mutual fund companies to upgrade their asset management businesses.
Indeed, Mr. Berlinski said Citicorp's planned merger with Travelers Group and BankAmerica Corp.'s pending marriage to NationsBank Corp. intensify the need for firms to build distribution and scale.
Coming at a time of stellar growth for asset management firms, Goldman's views are apt to fuel a lively discussion in the business. The investment bank caused a stir in 1995 when it predicted that 20 to 25 firms, each managing at least $150 billion of assets, would control the bulk of the asset management business by the end of the decade.
"We were wrong-what we predicted happened even faster," Mr. Berlinski said during a conference call with reporters Thursday.
Still, not all investment managers buy the argument for size.
"Just having distribution isn't going to be sufficient," said Phillip D. Tasho, chief executive officer of Rimco, a unit of Riggs National Corp., Washington. "What the individual is looking for is a handful of funds, not a lot."
Mr. Tasho, whose unit has $3 billion of assets under management, said distribution and size is worthless if an asset manager's performance is mediocre. That will become more apparent to investors when the bull market comes to an end, he predicted.
The authors of the Goldman report acknowledge that performance difficulties are a "penalty play." But, they add, "the severity of that penalty is inversely proportional to the depth of the franchise and the breadth of product."
They argue that over the next several years, brand marketing will be the key determinant of success. And that requires size and the resulting economies of scale.
For no-load fund companies, distribution costs are clearly on the rise. According to Goldman, Charles Schwab & Co. now charges investment managers 35 basis points to participate in its OneSource supermarket, up from 25 basis points a few years ago.
Similarly, wire houses charge an average of 220 basis points for managers to participate in their wrap accounts.
"You have to participate in these programs or your funds don't get sold," Mr. Strauss said.
Scale is also necessary for asset managers that want to take advantage of growing opportunities abroad. Only a handful of companies, including Franklin Resources and Amvescap, are diversified and broad-based enough to weather turbulence in markets overseas, Mr. Strauss said.
While Goldman is preaching the gospel of scale, the firm points out that acquisitions are not the only way to attain it. Investment managers can build via aggressive hiring, or they can go public. Mr. Strauss said.
"There's more than one way to skin a cat," Mr. Strauss said. "The public market is a very attractive vehicle right now."
