Jefferies Putnam report: ‘Pure play’ asset managers will eventually dominate the sector

Financial institutions will shed their investment management units over the coming months leading to “the most radical reshaping of the asset management sector on record,” according to a report released today by investment bank Jefferies Putnam Lovell.

“Pure play” asset managers — firms whose only business is asset management – will come to dominate the sector, said Aaron Dorr, managing director at Jefferies Putnam Lovell of New York.

They are the ones in the best position to buy asset managers from banks, brokerages and insurance companies that are selling so they can focus on their core businesses, he said.

Thirty-six percent of all financial deals involved asset managers in the first half of the year, according to the report.

“While the industry is by no means out of the woods yet, many asset managers have addressed the most critical issues facing their firms and have begun to focus outwardly, seeking to take advantage of rare acquisition opportunities to add scale, fill product gaps, add talent and expand product offerings at attractive prices,” the report said.

The asset management sector, however, isn’t the only sector that is likely to change.

Financial institutions are also in the process of shedding mid-sized broker-dealers, according to the report.

There are various reasons, Mr. Dorr said.

Mid-sized broker-dealers “don’t have the depth and breadth of market share of the top tier players,” he said.

As is the case with the asset management sector, larger financial instructions may decide to drop mid-sized brokerages to focus on their core businesses, Mr. Dorr said.

Larger financial institutions may also be looking to sell mid-size brokers to raise capital, he said.

And they may decide to sell because the regulatory climate globally has made it much harder to operate a mid-sized broker-dealer, Mr. Dorr said.

Reforms aimed at among other things improving transparency will “put pressure on many banks and intradealer brokers to enhance or invest in electronic broking, clearing and post-trade processing capabilities,” the report said.

It’s an undertaking that may be more trouble then it’s worth for some financial institutions, Mr. Dorr said.