McKinsey: Asset managers need to trim overhead just to keep up in this market

With the glory days of the 13-year bull market in its wake, the asset management industry is poised for a major reset that will likely separate winners from losers as the most efficient firms figure out how to do more with less.

A new report from McKinsey & Co., The Great Reset: North American asset management in 2022, paints a picture of an industry that has increased its overhead by about $71 billion over the past decade.

The next few years, McKinsey senior partner Ju-Hon Kwek said, will be all about trimming costs, doing more with less, and achieving scalability without just chasing scale.

“The asset management industry is very market-sensitive, and we’ve seen a big reversal in terms of macroeconomics and industry fundamentals,” he said.

The increased costs over the past decade have occurred across business lines within asset management firms. But of the $71 billion total, $28 billion is attributed to investment management functions.

Next is management and administration at $12 billion, followed by technology at $11 billion, sales and marketing at $9, other overhead at $6 billion, and operations at $5 billion.

“You’re going to see the growth in industry costs start to slow,” Kwek said. “The industry has been building complexities, which is fine when the markets are going up and the economy is strong. But we’re now in a world where these macroeconomic issues will be with us for a while.”

The biggest headwind for asset managers is the market, which was responsible for two-thirds of the industry’s growth over the past decade.

“There has already been a lot of belt-tightening in the first half of 2022, but that alone doesn’t get rid of $71 billion,” Kwek said. He expects companies to employ a host of “more fundamental changes,” including “product rationalization, simplifying operating models and de-layering managerial models.”

“Those are all things that unlock structural costs,” he added.

For perspective on the squeeze being felt across the asset management industry, the report highlights the “record wave of $1.6 trillion in new money that rushed in for 2021,” compared to the $281 billion worth of outflows during the first half of this year.

Kwek said the reality of asset flows, combined with a stock market hovering near bear territory, is already starting to separate leaders from laggards.

“The gap between the best and the rest of the industry is increasing year over year,” he said. “If you’re an asset manager in the bottom left of the matrix, this is a tough time, and I think we’ll see some consolidation and a fair amount of pain.”

One area where the asset management industry could find some untapped momentum is in “taking advantage of the dividend of the pandemic,” Kwek said.

“The industry had its best year ever in 2021, when everyone was sitting at home,” he added, suggesting the industry could leverage the cost savings associated with things like remote work and virtual meetings.

“It’s about driving scalability rather than scale,” Kwek said. “Scalability is about getting bigger with the same amount of resources.”