A new study of competition in the U.K. asset management sector is likely to lead to higher costs and lower revenues for the industry overall, as it forces firms to put clients at the centre of their businesses, rather than products, suggests Moody’s Investors Service report published on Monday.
Last week the UK’s Financial Conduct Authority (FCA) announced that it will carry out a study of the asset management sector to assess competition in the sector and whether it is producing good value for clients. The study will likely shed greater light on asset managers’ fee practices, Moody’s says, and that this will prove credit negative for the sector because it will likely lead to lower fees and increased costs overall.
See: FCA to review competition in U.K. asset management industry
“The study will likely focus on lowering fees and making them more transparent,” the rating agency says in a statement. “Another outcome could be the promotion of passive asset management (at the expense of more costly active management) and new business models such as digital advice providers that result in industry-wide margin compression.” In addition, Moody’s says that if the study results in additional rules, the resulting increase in compliance costs would likely also weigh on asset managers’ profits too.
On the upside, the FCA study should also result in greater inflows to the UK asset management industry, Moody’s says, if the outcome is greater international competitiveness.
In general, large asset management firms are better positioned than smaller firms to absorb lower revenues and/or higher compliance costs, Moody’s says.
“Operating costs for asset managers are already rising as they comply with new global, European and local regulatory requirements that call for increased internal controls, procedures and governance, and significant investments in information technology. These higher costs, combined with international competition, are driving fundamental changes in distribution strategies that must position clients, rather than products, at the center of the investment process,” the Moody’s report says.
“With fund and product fees receiving greater scrutiny from investors, managers have to spend more time, effort and money matching products with client needs, pricing them competitively and increasing brand awareness. These competitive trends and related costs create barriers to entry for new market participants, drive more consolidation and favour larger-scale asset managers,” the Moody’s concludes.
The FCA plans to publish its final findings, and any new requirements, in early 2017.