The FINANCIAL — In a new report entitled Asset & Wealth Management Revolution: Pressure on profitability, PwC predicts that fees will continue to fall up to 2025 as the Asset & Wealth Management industry faces sustained pressure from investors and regulators.
PwC estimates that mutual fund asset-weighted fees will fall by 19.4% from 0.44% in 2017 to 0.36% in 2025. As passive funds continue to grow in popularity and price becomes a key differentiator, they will see the sharpest fall of 20.6% up to 2025, whereas active mutual funds will see a decline of 19.3%.
This new report suggests how managers can consider the four foundations for a future-fit operating model during these industry changes. The model encourages managers to pay attention to value for money, finding a strategic positioning, understanding that technology is the key to future success and winning the battle for talent.
AuM is set to rise to US$145.4 trillion by 2025;
Traditional mutual fund management fees are set to fall by 19.4% by 2025;
Europe and Asia will see the strongest declines in mutual fund management fees of 26% and 24.6% respectively up to 2025.
Passives will see a strong fee decline across the board as popularity for these products increases competition;
Alternative fees have remained somewhat resilient; however as fee innovations lead the sector to become more outcome-based, PwC predicts management fees will fall between 13.1% and 16.4% by 2025 depending on the asset class;
Total expense ratios are set to fall faster than management fees during the forecasted period, indicating that investors will benefit greatly in the coming years;
In the developed markets, up to 25% of all mutual funds will close while exchange traded funds (ETFs) will grow significantly.
In Europe and Asia, ETFs will continue to expand as they are more broadly accepted by retail investors;
The ratio of revenue-to-AuM of traditional asset managers is estimated to fall by 22.4% up to 2025. This is despite PwC predicting that AuM will rise to US$145.4tn by 2025, indicating a sustained pressure on business models;
What does this mean for the industry ?
For the fittest, opportunities abound to take advantage and capitalise on predicted AuM growth;
As pricing concerns grow, the industry, in certain developed markets, will undergo significant consolidation with leading firms being acquired and laggards languishing. We estimate up to 20% of firms in developed markets will be eliminated by 2025;
The number of mutual funds in the developed markets could fall by up to 25% by 2025;
In order to maintain their margins, PwC has outlined four foundations upon which AWMs can build a future-fit operating model.
AWM managers need to clearly articulate why and how they provide value for money;
AWM managers also need to focus on their strategic positioning – what’s the plan?
If managers don’t transform through technology they will be eliminated;
AWM industry could lose the battle for talent, unless they appreciate and understand the changes and challenges that are coming their way.