The individual investor is set to become the sole source of net flows into the global asset management industry, bringing profits under pressure, intensifying competition, and attracting greater regulatory scrutiny, according to a new report. This new environment will pose new challenges and opportunities for the industry.
Darien, Conn.-based investment industry consulting firm Casey Quirk & Associates LLC on Monday issued a new white paper, which argues that the fortunes of the global asset management industry will become solely dependent on retail investors over the next few years. It says that by 2020, 120% of net new flows into investment strategies will come from individual investors, up from 90% in 2014.
Institutional investors will still represent a significant source of revenues, but the white paper argues that firms will largely gain assets by taking them from rivals, rather than through organic growth. Overall, organic growth for the industry is expected to slow to 2% by 2020, the white paper says. At the same time, the white paper foresees greater competition from other financial services firms from outside the traditional asset management business.
This increased reliance on individual investors, slowing top line growth, and increasing competition, will also transform the industry, the white paper suggests. For example, the white paper predicts that while industry profit margins will remain healthy overall, the gulf between successful and unsuccessful asset managers will widen.
In this environment, regulators will also push the industry toward more objective advice, the white paper predicts. “Policymakers worldwide ‘will call for objective and discretely priced investment advice’, re-arranging economics for asset managers,” the white paper says.
To win business from individual investors, the industry’s leading players will need to change how they compete embracing new competitive differentiators, such as product development, brand, and risk management, rather than relying solely on investment performance, the white paper says.
“Producing a slightly better mousetrap is not going to cut it in this era of individual investors guiding investment flows,” says Benjamin Phillips, a partner at Casey Quirk and co-author of the paper, in a statement. “Asset managers will face growing competition from larger financial services firms and will only prove their value by offering differentiated value propositions, strong performance, especially in outcome-oriented investments, and the brand to back it up.”