Operating margins for asset managers in the DST kasina Asset Manager Composite rose to 33.7% by Q3 2016 — an increase of 20 basis points from year-end 2015 — and AUM reached an all-time high for the Composite group: $10.6 trillion.
While this sounds like good news for the industry as a whole, the reality is being masked by the growth and scale of the largest asset manager in the group. When looking at the trend in asset flows, excluding the largest manager, the Composite shows five consecutive quarters of net outflows. While there are pockets of success in the industry, most asset managers are experiencing profitability challenges and the threat of consistent net redemptions.
Given these trends, I offer 10 predictions for 2017:
Prediction #1: The U.S. presidential election has given rise to speculation that the implementation of the DOL Fiduciary Rule might be delayed, or even repealed. However, our research shows that most broker/dealers and asset managers intend to forge ahead with compliance, since the current timetable does not provide the luxury of taking a wait-and-see approach. Moreover, many of the requirements under the Rule reflect broader market trends that will likely continue, even if the Rule is delayed or changed.
Prediction #2: Despite a year with a record 409 mutual fund closures in 2016 (through October 31), we expect the number to climb to a total of more than 450 closures in 2017 as distributor platforms consolidate fund offerings.
Prediction #3: As franchise valuations decline and asset manager fees come under greater pressure; look for the volume of U.S. asset manager merger and acquisition deals to surpass the levels reached in 2015 and 2016 to reach more than 150 deals in 2017. We can also expect to see a reduction in the number of unique fund families and individual funds from today’s figures of 750 and 8,048, respectively.
Prediction #4: Active to passive net equity fund flows will continue unabated, and likely accelerate in 2017 with a greater market and regulatory focus on fund fees. Passive mutual fund assets will surpass 30% market share, up from 23% by the end of November 2016.
Prediction #5: As managed accounts assets approach $5 trillion, fee-based revenue will continue to drive growth in financial advisor practices. The average advisor will derive more than 65% of revenue from fee-based assets.
Prediction #6: As technology-guided portfolio management continues to gain traction, more financial advisors will focus on goals-based wealth management. Model portfolios will influence more than 70% of market assets.
Prediction #7: Asset managers will continue to cut their fees on actively managed products, and a number of firms will do so in an aggressive fashion. The industry will also launch special purpose Institutional shares targeted specifically for IRA rollover sales.
Prediction #8: Distribution resources will be shifted from sales to national accounts teams, resulting in larger national accounts teams and slightly smaller, more streamlined sales teams. Firms will not always replace wholesalers who retire or leave the firm, allowing attrition to reduce the wholesaling ranks by 5% to 10% in 2017.
Prediction #9: Asset managers that invest in more sophisticated data for both marketing and sales will recognize significantly higher wholesaler productivity and marketing effectiveness compared with firms that continue to rely on the metrics that have been available to the industry for years.
Prediction #10: There is more pressure than ever on marketers to demonstrate their impact on business retention and growth. At least 30% of firms will use some form of methodology to analyze cross-channel attribution.
Scale is the name of the game in 2017. Asset managers that have a comprehensive product spectrum with differentiated active and expansive passive, broad national accounts efforts, highly targeted and sophisticated wholesaling, and the guts to make big decisions that could have negative, short-term revenue implications, will be the winners in 2017.