Separating facts from myth in asset management

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It has been approximately six years since the financial crisis of 2007, and assets under management in the fund management space have now returned to their pre-crisis levels. So does that mean the industry is back to where it was? Do comparable AUMs translate into comparable levels of profitability?

Now that the fund management industry has been through the wringer and emerged again, a new report by BNY Mellon and Ernst & Young examines the industry and tries to draw some conclusions about the effects of the stresses fund managers underwent and the challenges that lie ahead.

"Many unqualified assumptions and urban myths have circulated around the industry relating to the impact of the financial crisis," say the authors of the report, adding that while the crisis has sparked structural and behavioral changes, "there is no real understanding as to what those changes have been."

So what is the assessment? One observation is that the regulatory focus on transparency has nudged investors toward vanilla funds that are more transparent, and translate into lower fee revenues for the industry. The report (titled The Impending Profitability Challenge for European Fund Managers) focuses mainly on Europe, but notes the industry as a whole has moved toward more lower-revenue, passively-managed funds and ETFs. (In the US BlackRock, StateStreet and Vanguard collectively hold over 80 percent of ETF assets making the barrier to entry very high, the report states.)

Meanwhile, just as regulations are pointing investors toward the lower revenue funds, implementing regulations is costly, requiring an outlay estimated at $300 to $500 million a year for European fund managers. In other words, regulations have been the fund industry's double-whammy. 

As a result of the crisis, many asset managers have already trimmed the fat, so the costs of implementing regulations are not expected to come from leaner business models. The report suggests the answer is innovation.

The silver lining is that the 2012 Ernst & Young Innovation Survey found that regulations are the second biggest catalyst for innovation. (The first was clients.) Smaller firms tend to innovate with new products, while larger firms tend to use their scale or infrastructure to develop new revenue streams. Of course innovation does not only have to come in the form on new revenue streams – there is cost-cutting innovation as well.

Returning to the questions we started out with: is the industry back where it was? Not exactly. Profitability may not have returned to its pre-crisis level, but with global AUM back to record levels, there are opportunities. It's just that the path forward is not without pitfalls.