Asset Managers Need to Get Creative to Secure Their Margins

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Asset Managers Need to Get Creative to Secure Their Margins

Cost cutting is not the only solution to the persistent fee squeeze


May 2019, LONDON - In the face of ongoing fee pressure, asset managers in Europe need to think imaginatively and beyond cost cutting, according to the latest The Cerulli Edge—Global Edition.


“To remain competitive, asset managers must continue adapting,” says André Schnurrenberger, managing director, Europe at Cerulli Associates, a global research and consulting firm. “Compensation fee models, a focus on broad value-add services that tap different revenue streams, and product innovation are among the options.”


There may be additional benefits. For example, compensation schemes for portfolio managers that entail deferrals and clawbacks also help to show trustees that managers are in alignment.


Asset managers are innovating by focusing more on outcome-based solutions and using a broader definition of value for their institutional clients. This could include a bespoke index or an investment strategy tailored to regional investment.


Some passive managers are doing less for their clients. This has resulted in a new passive-plus bucket, where managers will add services that offer more oversight and control, although investors need to pay extra for these options.


Cutting costs can extend beyond reducing staff and fund numbers. For example, one online stockbroker is mitigating the impact of ultra-low fees in its passive range by cutting costs with the suppliers running those funds. It has homed in on costs charged by alternate delivery channel service providers such as depositories, custodians, and auditors, isolating which fees are fixed and which are a percentage of assets under management (AUM) and insisting on fixed fees that do not rise as AUM grow.


Some asset managers have abandoned the traditional approach to marketing and distribution, services that can soak up between 20% and 30% of asset management revenues. In one instance, a firm’s portfolio managers are active on social media, building their own following and sales.


“Asset managers’ operating margins have shrunk from highs of 40% to lows not seen since 2008. Innovative thinking is now crucial to success. Asset managers cannot produce the high returns their clients demand by following the crowd,” says Schnurrenberger. “They may wish to follow the example of one U.K. active manager, which has created an innovation committee tasked with generating ideas to deal with industry headwinds.”

OTHER FINDINGS:
• In the U.S., Cerulli has noticed a change in the way advisors’ clients pay. Research by the firm’s Boston office highlights an uptick in different types of fees and payment methods. Alternatives to the fee and commission models include subscriptions, retainers, and annual or hourly fees, as well as combinations of various methods to accommodate unique client situations.


• Asset managers in Asia surveyed by Cerulli’s Singapore office ranked controlling costs as the top response to fee pressure. The development of higher fee-earning capabilities was in second place. Perhaps surprisingly, passive fund launches were not ranked that highly. Cerulli believes that this could be because some active managers have conviction in their active investment philosophies—or because the fees for passive products are not worth the effort.

 

NOTES TO EDITORS:
These findings and more are from: The Cerulli Edge—Global Edition, May 2019 Issue.

 

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