Asset management costs for all asset classes are expected to drop by 20% by 2025 as fees are increasingly based on performance, according to PwC.
In a new report – Asset and Wealth Management Revolution: Pressure on Profitability – the consultancy argued that asset managers must embrace new technologies in order to cushion decreasing income.
PwC based its forecast on an analysis of the annual reports of 64 asset managers with combined assets under management of €40trn.
The past five years were a golden period for large asset managers, PwC said, as margins rose by almost 16% and costs fell almost 16% relative to an income decline of almost 10%.
Patrick Heisen, partner at PwC, said this was likely to reverse as fees came under more pressure.
“This is in part thanks to the regulation of the European Markets in Financial Instruments Directive (MiFID II), which has lead to greater cost transparency, but also to institutional investors becoming more cost-conscious,” he said.
Heisen added that the introduction of cheap passive investment products had accelerated this trend.
“Although interest in active products is to remain, their added value must be better demonstrable to institutional investors,” he said.
PwC concluded that costs would come down across all asset classes, and would affect cheaper passive products and more expensive hedge funds.
Fees for passive investments were expected to drop from 0.15% to 0.12%, PwC predicted, while costs for active equity mandates would fall from 0.54% to 0.44%.
“At these funds, we see the emergence of alternative fee structures, with the fee in part linked to outperformance,” Heisen said.
PwC indicated that the predictions applied to worldwide investments, but said it expected that decreases would be more significant in Europe and Asia, as the fees were higher relative to those in the US.
According to Heisen, asset managers should adjust their fee policy to the wishes and goals of institutional investors, adding that variation in fee models was still limited.
Innovation and rationalisation
PwC also recommended asset managers intensify product innovation, such as passive smart beta funds or funds investing in illiquid classes, including private loans.
“Moreover, asset managers should made clear choices, for example through rationalising their propositions,” the group said.
It said it expected a quarter of investment funds currently available to investors to disappear in the next few years.
Asset managers should also focus on retaining talented staff with an attractive working environment, PwC added, as technology was required to reduce costs.
However, Heisen also warned pension funds not to be too fixated on costs “as pension funds are long-term investors who also want asset managers still to exist in five years’ time”.
“Therefore, it is also important to check whether an asset manager is also preparing for the future, for example through sufficient investments in technology and digital infrastructure,” he said.