Deloitte consultancy subsidiary Casey Quirk has outlined four key trends set to transform the asset management world in 2017, including a deceleration in organic growth and distribution consolidation, that are leading to an acceleration in M&A activity.
In the report Skill through scale? the firm outlines its case for why the industry is a prime target for accelerated levels of merger & acquisition (M&A) activity this year and beyond.
The consultancy warns deals will require "substantially greater integration than the industry has tackled historically" and in most cases require substantial restructuring of investments, distribution and operations.
Casey Quirk has observed four drivers of what it sees as "the largest competitive re-alignment in asset management history".
1. Economic pressure
"Deteriorating economics in the operating environment", according to Casey Quirk, is the first factor pushing asset managers towards significant change.
They are facing historically low capital markets returns combined with a slowdown of post-World War II GDP growth on a secular basis and continued low interest rates, the report says.
"For an industry where revenues are fueled by asset growth, this is clearly a headwind," it adds.
Casey Quirk also identifies deceleration in organic growth, occurring as a result of asset managers already having tapped most conventional sources of new business for the industry, as another source of economic pressure.
In addition, the report said, managers face pressure on revenues from declining asset levels, and fee pressure, accelerated as investors push into lower-cost indexed portfolios.
2. Distributor consolidation
According to the report, asset managers are also suffering as the number of fund buyers is decreasing, while buying power is consolidating as distributors "want their manager relationships to be fewer and deeper".
In addition, policy pressure from regulators is raising compliance costs beyond the tolerance of smaller organisations.
Retirement among financial advisers is also a factor, as smaller advisory firms seek liquidity for departing founders, and larger intermediaries explore replacing human advisers with technology.
"As distributors consolidate, they will seek larger, broader relationships with fewer investment managers, and favour providers with well-known and respected brand names - all in an effort to capitalise on pricing power and reduce compliance risk," the report said.
3. Need for new capabilities
In order to maintain current fee levels, product development and innovation will be essential, the report said. Specifically, Casey Quirk said managers will need to develop:
• More outcome-orientated multi-asset portfolios
• Illiquid strategies that are less correlated to public markets
• Fixed income skills, focusing on private debt, credit and emerging markets
• Highly-differentiated equity strategies with less benchmark tracking
• Quantitative strategies offering smaller doses of alpha at lower fees.
"Expanding distribution capabilities and tapping new markets also will drive strategic thinking in corporate development," the consultancy added.