Money managers' assets heftier — but profits still pretty scrawny

Money managers' assets heftier — but profits still pretty scrawny
Prices to originate a sale rising as fees get squeezed; 'need to tackle business-model issues'
NOV 14, 2011
U.S. money managers' profits have failed to rebound alongside assets since the global financial crisis and will stay depressed for firms that don't adapt to a changing marketplace, according to a study by McKinsey & Co. Pretax profit this year will be 25 percent below the pre-crisis peak even with average assets at 92 percent of their record level of 2007, the New York-based management-consulting firm said today in a report. Expenses have grown 7 percent since 2007, while revenue has dropped 6 percent, McKinsey said. “Asset managers will need to tackle the business-model issues at the center of rising costs, lower prices and high variability of margins, or risk structurally lower profitability in the years ahead,” Salim Ramji, co-head of McKinsey's asset-management group, wrote in the report with several co-authors. Investment managers, a group McKinsey says runs “the most consistently profitable business in financial services,” saw profit plunge 45 percent and average assets fall 14 percent from 2007 to 2009 after the collapse of the U.S. housing market and subsequent credit crunch roiled financial markets. Managers typically earn fees based on a percentage of the assets they invest for clients. The lower profitability of firms after assets recovered stems from higher compensation and technology costs combined with falling prices for investment products and services, McKinsey said. The trend was driven in part by competition from exchange-traded funds and other index-based products that typically carry cheaper fees than those whose managers select investments. Double Trouble Large fund distributors, including brokerage networks, have also begun putting greater pressure on management companies to share more of their revenue, Ramji said. “The implication for asset managers is that the costs to originate a sale are going up while the prices they can command are coming down,” he said in a telephone interview. RELATED ITEM Five things to consider before upping your fees » Money managers will have to control costs and win client deposits in the areas expected to grow the most over the next four years, according to the report. Those include retirement- oriented products, international investing, sovereign wealth, passive investments including ETFs, and alternative products such as funds that use derivatives or have the ability to bet that a security's price will fall. “More than two-thirds of the industry leaders we surveyed agreed the vast majority of growth through 2015 would be concentrated in these areas,” the report said. “Curiously, the study also found that few firms seemed to be investing enough to tap these growth opportunities.” Firms best positioned to increase profits may be global companies that cover multiple asset classes, commit to investing in the fastest-growing product areas and do the best job at marketing to individual investors, Ramji said in the interview. The report was based on a survey of more than 100 managers with more than $12 trillion in assets under management, or about 60 percent of the U.S. market. McKinsey's 2011 projections were based on results as of Sept. 30. --Bloomberg News--

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