Profitability hit forecast for asset managers

The next five years are likely to be “much tougher” for asset managers due to a combination of an evolving technology landscape and regulatory changes. 

Proprietary EY data modelling assessed the likely outlook for the sector and found it would be tougher for asset managers going forward which would have a “dramatic” effect on profitability.  

Economic and demographic factors would reduce net inflows from historic levels of 3% to 4% to around 2% per annum.  

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EYs base case scenario assumed assets under management (AUM) would grow 15% between 2021 and 2025 and average operating margins would decrease by 0.8 percentage points. However, for the majority of firms, profitability would fall faster as the industry’s profits would likely be divided by fewer firms.  

For its worst-case scenario, flat AUM growth would lead to a 7.3 percentage point reduction in average operating margin by 2025. Asset managers would then need to remove 10.3% of total costs over the five years in order to maintain operating margins at 2020 levels. 

“The next five years will see the speed of change accelerate, pushing firms to do more with less. Competition and regulation will erode fees in every asset class, and the shift to lower-margin strategies will also reduce income,” the report said. 

“Economic and demographic factors are likely to reduce net inflows from historic levels of 3% to 4% to around 2% per annum, and the need to invest in new products and technology will push up spending.” 

In order to survive in the future, firms would need to transform their business models, realign their businesses around the client, invest in digital transformation, explore new areas of growth and leverage inorganic opportunities. 

“Institutional investors will seek a combination of capital preservation, high yields and strong environmental, social and governance (ESG) performance,” it said. 

“Retail demand for tailored solutions and ESG investing will grow too, along with advice and education. Asset managers will be forced to accelerate diversification, using alternatives to push up returns while making greater use of low-cost options, such as factor investing and enhanced beta.” 

EY highlighted that Australia, in particular, was likely to see significant consolidation, rationalisation and new market entrants which would change the asset management landscape. 

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