The asset management industry is succumbing to pressure on fees, which will continue to drive merger and acquisition activity in the coming years — that is old news. But asset managers now have other worries, too, including financial advisors.
The majority of distribution executives in asset management (65%) said in 2019 that fee pressure from broker-dealers was one of the top challenges for asset managers, according to a new report by Cerulli Associates, a Boston-based research and consulting firm.
For years, more investors have been favoring relatively cheap, passive investments, financial advisors have used higher-cost mutual funds less frequently, and stricter regulations have led to rising compliance costs.
“To justify their fees to allocators, asset managers need strong brands and expanded service sets that clearly delineate them from competitors,” according to the report published Monday. To do that, deals are being done to achieve better scale, expand geography, and acquire special capabilities or expertise. For example, Invesco bought OppenheimerFunds last year, bringing its total assets under management to over $1.2 trillion at the time; U.K.-based Henderson merged with U.S.-based Janus; and Eaton Vance acquired Calvert Investments, giving it “one of industry's best-known sustainable investment brands.”
Deal activity has “exploded” in recent years and in just the fourth quarter 2019, there were 50 deals involving asset managers, according to Cerulli. The Covid-19 pandemic has increased the level of uncertainty for nearly all sectors of the economy, but the researcher expects a substantial rise in deal volume throughout the next decade.
In addition to pressure on fees and less shelf space — a shrinking number of products approved and made available to financial advisors — asset managers now face another rising challenge.
Financial advisors are increasingly outsourcing investment decision-making by way of model portfolios constructed by their home office. But even advisors without a home office creating models for them can find them elsewhere. And advisors (including most independent RIAs) are also increasingly using turnkey asset management platforms, or TAMPs. That means asset managers are competing for few opportunities in the future to be the preferred solution for big pools of advisors and assets. (This is perhaps why some think model portfolios are the “next big opportunity” for asset managers.)