Although the asset management industry is facing unprecedented challenges, companies that make the appropriate adjustments to adapt to the changing market will remain resilient, according to Jonathan Tetrault, associate principal at McKinsey and Company.

Speaking at the Investment Counsel Association of Canada’s annual general meeting in Toronto, Tetrault said the average industry profit margin is expected to be 24% in 2008, down from 33% in 2007, despite a significantly shrinking asset base and huge losses related to the sub-prime meltdown.

“The good news is that the industry should be resisting relatively well,” he said. “It’s a sign that the industry is even more mature, more robust, more resistant.”

Continued profits are largely a result of the industry’s focus on cutting costs. Tetrault said 50% of the asset management firms surveyed by McKinsey have been assessing and cutting costs in the past six months.

“The industry has been pretty quick at looking at costs, and trying to find opportunities to manage costs,” he said.

Still, the results will be very diverse between companies, Tetrault noted. He said 15% to 20% of firms would report negative margins in 2008, and only 20% to 25% of firms will have margins at or above 30%.

Asset management business on the institutional side has been impacted to a lesser extent than retail business, Tetrault said.

He explained that most institutional clients are not altering their fundamental investment strategies as a result of the market turmoil. Rather, they are paying closer attention to their portfolio managers to ensure their fundamental investment philosophies are prevailing.

Retail investors, meanwhile, are panic-stricken. “Investors are literally paralyzed by the uncertainty in the market,” said Tetrault. He added that more than half of investors surveyed by McKinsey indicated they would not make any investments in the next six months due to the state of the market.

The mindset of investors is shifting from capital appreciation to capital preservation, he said, adding that the volatility is driving up demand for financial advice.

To be successful on the institutional side going forward, asset managers need to spend more time understanding clients’ objectives, needs and preferences, according to Tetrault. He said many clients feel that their asset managers don’t spend enough time with them, building and strengthening the relationship.

Tetrault also recommends that companies expand their services to offer clients more access to their research and expertise, and more widespread advice on market conditions and opportunities.

“Institutional clients believe that they should get more out of their asset manager than just asset management services,” he said. “What they want is a real partnership.”

Asset management companies should also focus on three main drivers of profitability: client retention, cross-selling opportunities and more discipline in fee discounting.

On the retail side, Tetrault said a greater focus on distribution is critical to the success asset managers. He encourages them to explore new channels and platforms of distribution.

He also warned companies to be cautious about launching new products in the current market environment. Instead, Tetrault said companies should focus on the core products that have driven their success in the past.

IE