Ernst & Young expects years of change lying ahead for the global asset management industry at both, the institutional and retail, level. EY identifies the top nine drivers of change for this industry, which asset managers have to address.
First, regulatory changes, particularly MiFID II, will affect the global asset management industry in terms of how they distribute their products, incentivise their client-facing advisors and communicate as well as interact with their clients. MiFID II will affect most global firms as Europe is the second largest market in terms of assets under management, says EY in their report “nine key drivers of change for the global wealth and asset management industry”.
As organic growth is costly and can only be achieved in the long term, some publicly traded asset management companies, particular small- and mid-sized ones, are becoming to be prices more attractively as shareholders do not want to wait for results. Driven by the desire to grow rapidly, M&A activity in the asset management is likely to increase.
Third, spending on private wealth management growth will cool down and refocus. After the financial crisis, some asset managers have expanded their PWM business. They will now start to focus on organic growth, efficiency and profitability.
Fourth, the report tackles the problem of the pension gap. “The day of reckoning will likely require more public sector debt to be issued to partially fund the current deficit, as well as significantly restructure the benefit system, or at least a greater public debate about how little actual capital has been set aside to safety meet growing expectations of future pension solvency and retirement security,” says the report.
Moreover, the report acknowledges that the robe-advisor has arrived on the marketplace as some electronic platforms have reached noticeable assets under management. Using online tools, those automated advisers are able to deliver advisory at low cost and are outstanding in delivering client experience.
A further thread to traditional asset management are ETFs, which are receiving huge inflows by now. The report predicts, that “soon, any firm offering active management, either as a registered or an alternative product, will be forced to compete for investors’ attention and wallet share against ETFs, whether they like it or not.”
The seventh key trend is the comeback of fixed income as an asset class illustrated by the bullish inflows seen in 2014. Still, the low interest rate environment challenges fixed-income managers as they need to build an economically suitable business model, particular for the short- to mid-duration product.
Emerging markets will see only limited growth. After the ruble crisis, low commodity prices and the bubble in Chinese equity, emerging markets growth had to be revised although some economies might still be very attractive. For China, the report identifies the potential to become a top five market for the global wealth and asset management industry but not in 2015.
Finally, share buybacks will accelerate. Despite much debate in the financial media and academia whether share buybacks are the best use of excessive cashflow, publicly traded asset managers will look to enhance their capital structure and return cash to their shareholders using share buybacks.