Asset managers face rising costs, sluggish revenues but AI might save the day

The headline figures for the asset management industry in 2023 look good – AUM growth of 16% in North America and a global 12% rise to almost $120 trillion following 2022’s 9% decrease.

But beneath the surface, the picture is less rosy with revenues up just 0.2% and costs up 4.3%. Profits fell by 8.1%. And a new report from Boston Consulting Group suggests it’s a trend that could well continue.

There are several reasons including pressure on fees, rising costs, investor preferences, and that for almost 20 years revenue growth has come from levels of market appreciation which cannot be relied on in the future.

The average fee in 2023 was 22 basis points, falling from 25 bps in 2015 and 26 bps in 2010. Acceleration of fee compression is a key pressure for asset managers. Meanwhile costs have grown 80% since 2010 at a CAGR of 5%.

Investors are also opting for passive products more often. Passive attracted 70% of total global mutual fund and exchange-traded fund net flows (about $920 billion) in 2023. During the 2019-2022 period, 57% of net flows went to passive.

Finally, just 37% of new mutual funds launched in 2013 still existed in 2023, and the development of new products are often not successful.

AI TO THE RESCUE?

The BCG report highlights how the use of generative artificial intelligence is an opportunity for asset managers.

“The structural challenges facing the industry will only continue to grow,” says Dean Frankle, a managing director and partner at BCG, and coauthor of the report. “To remain competitive, asset managers will need to seize the opportunities offered by artificial intelligence and double down on investing in enhanced productivity, product personalization, and the opportunity of private markets.”

RIAs are also being offered new ways to use technology to improve efficiency and outcomes, such as a new platform RIA GPT which has been launched this week.

Key findings from BCG’s global survey of global asset managers in the first quarter of 2024, in partnership with the Investment Company Institute (ICI) and the CFA Institute include:

• 72% think that GenAI will have a significant or transformative impact on their organization within the next three to five years
• 66% have made GenAI a strategic priority for their business
• 75% are actively dedicating capital and human resources for GenAI deployment in the short term, with 29% committing a significant portion of their innovation budget
• Only 16% have fully defined a strategy and are working on implementing it throughout the business

“Generative AI opens up tremendous potential for innovation within the asset management industry,” says Peter Czerepak, a managing director and senior partner at BCG, and coauthor of the report. “Achieving results will require strategic thinking and the ability to execute at scale. With traditional sources of growth slowing down, it’s imperative for firms to move forward on this journey.”

The report Global Asset Management Report, AI and the Next Wave of Transformation is available on the BCG website.