Is the Asset Manager business model outdated?
Asset management was considered a lucrative industry for a long time. But it's not just since the Corona crisis that asset managers have faced major challenges. Cost pressure and falling profit margins are a major problem that financial administrators must deal with. We will show you which scenarios in the industry are flourishing and what means financial investors can use to orient their future towards innovative developments.
What problems do asset managers face?
Intensified by the Corona crisis, financial and economic stimulus programs worth billions have decoupled the real economy from the financial markets. This situation fuels the problem areas of asset management: The high costs in particular are a major disadvantage of these financial services, which are increasingly in competition with modern, passive investment opportunities or technology-driven business models that combine flexibility with cost efficiency.
The development of the markets in the coming years is uncertain. However, it is likely that central banks will continue to keep interest rates low, but credit interest rates will rise at the same time. However, actual development will depend on when the decoupling of financial markets from the real economy ends and how dramatic the consequences of the corona pandemic will be. The decisive factor will be how quickly the economy recovers from the slumps of the Corona crisis and how quickly it can return to its former strength. Based on a study by strategy and management company zeb, there are three scenarios for the economy and the asset sector. It describes solutions for how managers can successfully survive this crisis and use market pressure in the financial sector to change.
Scenario 1: Past market development continues
Scenario 1 of the zeb study provides for constant growth rates, which have already existed on average in previous years between 2015 and 2019. Equity markets are already above or at least at pre-crisis levels and are constantly being fed with new money from governments and central banks to avoid a dramatic slump. This scenario is very optimistic and assumes that the decoupling of the real economy and financial markets will continue over the next five years. The strong growth of the technology and healthcare sectors over this period must more than offset the losses suffered by traditional industries. These key industries are leading the market performance during this period.
Scenario 2: Market growth is stunted and levels off at a lower level
The second scenario of the zeb study assumes lower market growth in the next five years, in which market performance is only half as great as in the past five years. This takes into account a rapid recovery of the markets, which leads to a classic V-shaped course of the economy. For asset managers, the ongoing cost pressure due to rising fees and investments in this scenario is clearly noticeable. Asset companies that offer a mix of active and passive strategies are experiencing a decline in earnings of up to 30 percent. Asset managers who only offer active strategies could see a decline of around 15 percent. The rising fees on the part of asset managers are offset by high pressure from investors for fee reductions, which must be taken into account by making downward adjustments to variable costs.
Scenario 3: The next five years offer no growth
The third scenario of the zeb study is the most conservative in comparison. Here, instead of a V-shaped development, it assumes a U-course. This is based on market development that is not characterized by a rapid recovery, but is dragging on for much longer. This results in growth of zero percent on average over the next five years. This includes rising costs for the transition to digitization and increasing regulatory expenses for asset managers.
Regardless of which scenario is used as a basis, the profit margins for asset managers fall in all three variants. Even in the case of optimistic scenario 1, margins can be expected to fall by 20 percent. In the second and third scenarios, they even fall by 30 percent or 60 percent.
The future of asset management is digital
The performance of active managers is being viewed increasingly critically. Why should investors pay comparatively high costs for a financial service when they receive similar return expectations by investing in blockchain-based solutions where they can build their own portfolio? Asset managers must ensure their competitiveness against competing services in a changing financial sector.
A holistic corporate approach is essential today, which is open to customer-oriented, far-sighted planning that includes future trends. It is important for asset managers to specifically highlight the unique selling points of their service in order to keep the offering attractive for their customers — especially in times of increased contactless communication points, trust is created through personality and individual competence.
Measures should always be taken in line with the future orientation of the company and the associated product portfolio. Asset managers cannot avoid the shift to digitization either. A clear vision on the path to digitization is crucial. Effective data governance combined with a data management system saves costs and optimizes process flows.
