Asset managers must ‘capture scale opportunities to remain successful’ warns consultancy

The study, Capital Markets Vision 2022, found wealth and asset managers generate 90% of overall economic profits in the capital markets industry (after tax and cost of equity), making them far more profitable than investment banks.

However, it also found they are failing to achieve scale efficiencies and must prepare for down-market scenarios and shrinking margins.

The report said: “Asset and wealth management are two of the most profitable subsegments of the industry. They even seem to defy economic logic.

“While structurally these segments should be a scale game, in practice they are not. Our analysis found that even the biggest asset managers create the same economic profit margin as some of their mid-sized peers. The same pattern can be observed in wealth management.

“This is absolutely counterintuitive, but it is an economic fact. We believe that all buy-side players, including asset and wealth managers, will need to truly industrialise their businesses and capture latent scale opportunities going forward to remain successful.”

Vectors for change

The report said there are “numerous potential vectors for change” on the buy-side, that will challenge existing business and economic models.

These include the environment to which firms must adapt their money management (such as the move towards “100-year life” pension solutions), how they are achieving this, and how they are being compensated. According to Accenture, this translates into a single theme that will continue to dominate the industry: fee pressure.

Buy-side revenue scenarios to 2022 – $bn

 

 

 

 

 

 

 

 

 

 

 

 

Note: Due to rounding, some totals may not correspond with the sum of the separate figures

Source: Accenture Research

“It is thus very likely that this fee contraction will offset —or even overcompensate—any future growth in AUM and will drive down economic profit,” the report said.

“We believe that all buy-side players should prepare for a squeeze scenario in which volume will likely grow but margins will continue to shrink (see chart). The only questions are by how much and how quickly this will happen in the period leading up to 2022.”

The report also found during the 2017 financial year, asset managers earned $31bn of profit and hedge funds earned $16bn, with both keeping around 15% of their revenues. However, investment banks did not do as well, with the 12 largest institutions earning a net $600m of profit, which amounted to just 0.3% of revenues.

Michael Spellacy, senior managing director at Accenture and co-author of the report, said: “Some expect the capital markets sector to normalise again and resemble itself before the financial crisis, but our outlook for the years ahead is very different.

“This industry still leans heavily on historically ‘lucrative inefficiencies’, when there was little incentive to change the status quo because the industry was generating such strong profits.

“But unlike in other sectors, the core business of capital markets accounts for a very small fraction of its cost bases — and in an era of rapid digital innovation, that leaves the industry ripe for disruption.”

About the author

Jayna is senior reporter and investment trust correspondent at Investment Week. She joined the publication in August 2015 after graduating with an MA in Multimedia Journalism from the University of Kent.

Jayna holds the NCTJ diploma and has experience in print, online and broadcast journalism. She is responsible for the Investment Week monthly podcast.

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