The Path Ahead

Redefining the Asset Management Operating Model

Asset management firms have recovered well since the financial crisis, Assets under management (AuM) stand at record levels, net revenues have risen and costs (as a percentage of AuM) have been stable (see Exhibit 1). During the recovery from the global financial crisis, we have seen global AuM growth of 8% per annum. Current conditions, on the surface at least, would appear to indicate that asset management firms are entering calm waters.

However, despite a slight decrease in cost margin (from 16 to 15 basis points (bps)), overall cost has increased by US$29 BN (approximately one third), now reaching a total of US$119 BN. Therefore, while the current average cost-to-income ratios of a little more than 60% look acceptable, any external shock may well hit asset management profitability hard if companies do not adjust their cost base.

Indeed, even with the recovery since the crisis, asset managers are uneasy. Increasing regulatory costs, the sustained challenge to the asset manager value proposition due to the inconsistent delivery of alpha performance, and the secular shift to passive products will all influence profit margins in the coming years.

On the other hand, a trend towards alternative investments has bolstered returns as investors look to increase their chances of achieving the required yields. Moreover, the industry as a whole has benefited from the unprecedented accommodating monetary policies throughout the world.

But when those policies inevitably end, it will reshape the industry as we have come to know it.

To position themselves ahead of the curve, asset managers must proactively prepare themselves for a paradigm shift in their operating environment. They should focus on key initiatives that can ensure sustained growth momentum, while at the same time carefully managing costs. In doing so, asset managers must review their entire operating model, challenging received wisdoms and questioning practices that may not be suitable for a fast-evolving environment.

Pulling the right operating model levers will not only help asset managers to manage costs more effectively, for example through building efficiencies and thus eliminating wasted effort and expenditure. It will also help them to supplement revenues, notably through increasing nimbleness and reducing time to market.

It is within this context that we are pleased to present this point of view.  We have drawn upon our significant experience within the industry. We have assessed the state of the industry as a whole, the fundamental forces that are changing its shape and the key initiatives asset managers are already undertaking in a bid to achieve success. In addition, to garner a peer perspective, Oliver Wyman conducted multiple interviews on the subject with senior executives from asset management firms across the globe.

Our intention is not to introduce yet another operating model framework. We would like to concentrate on those areas which our discussions with asset managers highlighted as critical in their quest for eliminating costs and, more importantly, for building new efficiencies. In this paper, we explore the five most important of these initiatives, which may well span more than half of total expenses of asset management firms.

The Path Ahead – Redefining the Asset Management Operating Model