The asset management industry felt the ground shift during the
recent financial crisis, but there are still plenty of signs of
resiliency, according to a new benchmarking study from consulting
firm McKinsey & Co.
First, some tough realities: Average industry operating margins
ended the year at 22%, plunging from its high of 33% in 2007. As a
group, asset managers will also come under pricing and competitive
pressures from leading financial advisory firms-like Charles Schwab
[SCHW], Fidelity Investments, Morgan Stanley Smith Barney [MS],
Bank of America/Merrill Lynch [BAC], and Wells Fargo [WFC], which
collectively controlled roughly 55% of U.S. household assets in
2009, up from 40% five years ago.
"Clearly they have stronger bargaining power, and we believe
they have not yet applied that to the marketplace," said Pooneh
Baghai, a director at McKinsey & Co. When the leading advisory
firms decide to exert that influence, they could extract as much as
10% in pricing concessions from the asset managers. Almost all of
the retail asset managers that were surveyed, 88%, said they
believe Schwab and other so-called distributors will capture an
increased share of asset management revenues over the next two or
That would bridge the profit margin gap that exists between the
two businesses. In their strongest years, some of the leading
brokerage firms earned a 21% margin. The worst year for the asset
management industry, the group earned a 22% margin.
"It is a terrific time to be an advisor," Baghai said. "The best
firms are coming to you with more focused service and product
propositions, and you will have a lot of choice. The challenge is
figuring out with whom you want to partner."
McKinsey & Co., with offices in 40 countries, surveyed 110
firms with more than $9 trillion in assets under management, which
represents more than 40% of the industry and over half of the
actively managed universe.
Asset management firms, however, are finding several ways to
maintain profitability. Firms found ways to cut costs by an average
of 6%, which helped those margins. They looked at their cost bases
and farmed out functions that were not core to their operations,
like customer service and transfer agency work, Baghai said. They
culled their product offerings, in some cases focusing on
McKinsey identified three winning business models post-crisis.
They were the at-scale firms, which are companies with an average
AUM of $300 million, multi- boutiques and niche specialists.
Further, at-scale specialists increased their market share from 27%
Survey respondents that were successful in retooling their
business models have become product specialists, rather than trying
unsuccessfully to have representation in all asset classes, Baghai
said. "This is no longer an industry where a rising tide lifts all
boats," she said. "Unlike past decades, where you could select
across all of these [asset classes], asset managers need to make
deliberate choices about where to focus, and how much to invest to
Even as specialists gain ground, however, large firms with the
resources to compete across many different asset classes will still
be extraordinarily profitable, Baghai said.