Trends: Assets under management still growing despite pressure for industry reform

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on November 20, 2017 - November 26, 2017.
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Global assets under management (AUM) are expected to almost double by 2025 to US$145.4 trillion, with passively managed funds gaining market share over actively managed funds, according to a recent report by PricewaterhouseCoopers (PwC), as the traditional asset and wealth management industry is confronted with the need for change.

The report, Asset & Wealth Management Revolution: Embracing Exponential Change, highlights that the emergence of more direct and affordable passive investing strategies has resulted in a shift of power to investors and pushed down the pricing for asset and wealth managers.

PwC forecasts funds under active management to rise to US$87.6 trillion by 2025 from US$60.6 trillion in 2016, but their share of overall global AUM will fall to 60% by 2025, from 71% in 2016. On the other hand, market share of passive strategies will increase to 25% in 2025 from 17% in 2016, while alternative strategies will grow to 15% from 12%. The AUM of passively managed funds will more than double from US$14.2 trillion in 2016 to US$36.6 trillion in 2025.

The report also points out that heightened regulatory scrutiny after the 2008 global financial crisis has also chipped away at the industry’s bottom line. The trend among regulators worldwide, to either ban or regulate commissions for advice, will significantly reduce the level of retail fees and put pressure on revenues in the next five years.

According to the PwC’s estimation, profit margins of asset and wealth management firms have fallen globally by about 10% since the global financial crisis due to pressures by passive players on pricing and flows as well as rising regulation and technology costs, both trends that are expected to continue.

Some regulations that have added financial burden to the industry include the UK’s Retail Distribution Review that was implemented in 2012, banning commissions for advice. PwC’s previous analysis showed that UK passive fund sales more than doubled in the years following the decision and the number of financial advisers fell by almost a quarter.

PwC estimates that asset and wealth managers’ fee levels typically fall 15% to 20% in countries that introduce this type of regulation. Similar regulations have been introduced in Australia, South Africa and the Netherlands. In Asia, the Securities and Exchange Board of India is trying to drive mutual fund expense ratios down.

Other than complying with more stringent regulations, the industry also has to confront the changing demands of investors. The millennial generation, in particular, is wary of wealth managers and prefer the convenience of mobile apps, as well as investment models such as passive and non-traditional investments. They hold a general scepticism for traditional finance. PwC expects this generation to turn towards automated wealth management solutions — robo advisers — and increase the use of passive funds for asset allocation.

Asset and wealth managers will have to adapt to the demands of investors and regulators if they want to tap the growing population worldwide who are accumulating wealth, especially in developing Asia-Pacific and Latin America.

“Asset managers can take advantage of this massive global growth opportunity if they are innovative. But it is do or die, and there will be a ‘great divide’ between a few haves and many have nots. As a result, things will look very different in 5 to 10 years’ time and we expect to see fewer firms managing far more assets significantly more cheaply,” says PwC global asset and wealth management leader Olwyn Alexander.

However, investors are also seeking multi-asset, outcome-driven solutions that may combine all active, passive and alternative strategies, which may be a more resilient approach. This is why active management still has a role to play in the industry, PwC notes, especially as passive strategies hold risks of their own.

“In the ongoing debate over active versus passive investing, we are optimistic for both. While we anticipate a faster pace of growth for passives due to greater allocations than for active, we still predict growth in active investments, which will continue to preserve active management’s dominant market share. It is important to remember that in a rising market, passive returns are very attractive at a low cost but that inevitable market corrections will bring a continued appreciation for the value of active investments. Both will be key building blocks in balanced portfolios to meet specific investor outcomes,” Alexander says.

Smart beta products may be a more resilient choice for investors, and as quantitative easing declines, there will be a greater dispersion and emphasis on active stock selection and asset allocation.

The report also notes that alternative asset classes, especially real assets, private equity and private debt, will more than double in size by 2025 as investors diversify their assets to reduce volatility and achieve specific outcomes.

Much of the growth in global AUM will be driven by developing Asia-Pacific. PwC expects the industry in that region to grow 8.7% per annum from 2016 to 2020, and accelerate to 11.8% from 2020 to 2025. Latin America is predicted to grow at similarly rapid rates at 7.5% and 10.4% in the two time periods. This is in comparison with Europe, which is projected to grow at 8.4% and 3.4% per annum respectively, and North America, at 5.7% and 4%.

A trend PwC highlights in the report is the pronounced shift towards the practice of defined contribution retirement saving. Governments around the world are relying on individual retirement accounts and defined contribution plans to help people save for retirement. The need to bridge the retirement savings gap is expected to rise with longer life expectancies in many countries. This is especially obvious as many of Asia’s economies have rapidly ageing populations. Japan and China are ageing the fastest, followed by Singapore, Hong Kong and Thailand.

The potential risks that may influence the growth rate of global AUM are the rising populism in Europe, Brexit negotiations, China’s transition to a consumer-driven economy, Asian geopolitics and potential changes in the US policies of regulation, tax and trade.