Asset Management

Wealth Managers Triumph Over Asset Managers – Boston Consulting Group

Harriet Davies Editor - Family Wealth Report 14 September 2012

Wealth Managers Triumph Over Asset Managers – Boston Consulting Group

Growth in the global asset management industry has stalled, according to the Boston Consulting Group’s latest report on the sector, as wealth managers and distributors have “flexed their muscles” and captured a greater share of the value chain.

Asset managers failed to attract substantial asset flows last year, or indeed in any year since the financial crisis, leaving the market stuck at its 2007 level, the report says.

This is not the first report to warn that the economics of the industry, as it has typically been set up, are being threatened by certain trends. These include the rise of lower-cost passive products and the regulatory environment, which has made deposit gathering relatively more attractive than asset management as a business, the report says.

For example, a report in June from McKinsey & Company said that growth in the asset management industry has been confined to a limited number of scattered segments, and that the economics of the industry have “seriously deteriorated” since 2008. According to the BCG study, passive, alternative and specialty asset classes are growing while traditional managers are losing out.

The industry represented $58.3 trillion assets at the end of 2011, compared with $58.8 trillion at the end of 2007, while net flows have plummeted. Average net flows were 4 per cent of industry assets in 2007, and 0.1 per cent in 2011. In 2010 they were -0.2 per cent, and have generally hovered near to the zero mark throughout the period.

Examining these figures further, BCG says they are a product of high nominal growth in emerging markets which, due to the smaller base from which assets are growing, has a small impact on global growth. Meanwhile, in mature markets – which represent the vast majority of global AuM - retail assets are declining.

Regional trends

Last year, North America, which represents 48 per cent of the world’s assets under management and a $27.7 trillion market, “registered essentially no growth overall,” says the report. Europe saw AuM fall to $17.4 trillion, down from $17.5 trillion, with Southern Europe and France registering particularly strong declines. Neither Japan nor Australia fared well either, with both countries’ share of global AuM falling.

Asia ex-Japan and Australia saw a 5 per cent increase in average assets last year, to represent $3.2 trillion in total. Within the region, Indonesia, Malaysia and China grew assets under management the most. Latin America’s industry expanded assets by 12 per cent to $1.5 trillion, while AuM in the Middle East and South Africa grew 1 per cent.

Retail asset management has performed especially badly in terms of gathering assets, “failing to re-conquer the hearts of investors,” says the report. Instead, retail investors are looking for transparency and safety.

Distributors in ascendancy

Wealth managers have captured a larger share of industry revenue at the expense of asset managers, the report says. This is being driven by regulation in the US and Europe which is seeking to drive out commission payments and move financial advice towards a fee-based model. This incentivizes wealth managers to drive down asset management costs, as a service provided to their clients.

In the US, this is visible in the growing power of the RIA industry, which has attracted high-powered proponents, and the push for a uniform fiduciary standard. Within this model, a growing number of multi-family offices are positioning themselves as “sitting on the same side of the table” as the client, and from this standpoint are looking to use their collective buying power to drive down the cost of products.

In the UK, meanwhile, the Retail Distribution Review means that from January 1, 2013 investment advice will be fee-based and advisors will have to define themselves as either independent or restricted, with certain criteria needed for an independent tag.

Investor preferences

In other trends, low interest rates and changing investor tastes have accelerated the demand for specialization and multi-asset capabilities, the report says. Passive products have grown quickly, with assets invested in exchange-traded funds rising from $0.8 trillion at end-2007 to $1.3 trillion in 2011.

Demand for alternative assets, including non-listed products like infrastructure and bank loans, has been growing, as investors seek income, diversification and inflation protection.

In fixed income – the “traditional stronghold of active managers” – passive investment is also taking hold, and is “no longer considered irrelevant,” says BCG. This segment of the industry has also been affected by low rates of return and concerns over just how “risk free” government bonds are.

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