For nearly two decades, strong market performance spurred revenue growth. But in 2022, global assets under management fell by 10% to $98 trillion. In an era of market uncertainties, fee compression, rising costs, and technological change, asset managers should transform and build more innovative organizations by pursuing the three Ps:
- Profitability. Optimize costs throughout the organization, rather than just cut expenses.
- Private Markets. Consider entering the alternatives space—which has high-growth opportunities—and offering private market products for retail and institutional investors.
- Personalization. Implement technologies that make highly personalized client experiences and products, such as direct indexing, possible.
The path to transformation is clear and imminently achievable for most. The leaders who take action now are most likely to survive and thrive in the decade ahead.
Share
For nearly two decades, strong market performance spurred revenue growth. But in 2022, global assets under management fell by 10% to $98 trillion. In an era of market uncertainties, fee compression, rising costs, and technological change, asset managers should transform and build more innovative organizations by pursuing the three Ps:
- Profitability. Optimize costs throughout the organization, rather than just cut expenses.
- Private Markets. Consider entering the alternatives space—which has high-growth opportunities—and offering private market products for retail and institutional investors.
- Personalization. Implement technologies that make highly personalized client experiences and products, such as direct indexing, possible.
The path to transformation is clear and imminently achievable for most. The leaders who take action now are most likely to survive and thrive in the decade ahead.
Financial Institutions
/Report
Global Asset Management 2023
ByChris McIntyre,Sultan Alsubaihin,Simon Bartletta,Philip Bianchi,Joe Carrubba,Peter Czerepak,Dean Frankle,Lubasha Heredia,Bingbing Liu,Gleb Margolin,Michele Millosevich,Miftah Mizan,Edoardo Palmisani,Ian Pancham,Neil Pardasani,Kedra Newsom Reeves,George Rudolph,Blaine Slack,Brian Teixeira, andAndrea Walbaum
Reading time: 5 min
Key Takeaways
For nearly two decades, strong market performance spurred revenue growth. But in 2022, global assets under management fell by 10% to $98 trillion. In an era of market uncertainties, fee compression, rising costs, and technological change, asset managers should transform and build more innovative organizations by pursuing the three Ps:
- Profitability. Optimize costs throughout the organization, rather than just cut expenses.
- Private Markets. Consider entering the alternatives space—which has high-growth opportunities—and offering private market products for retail and institutional investors.
- Personalization. Implement technologies that make highly personalized client experiences and products, such as direct indexing, possible.
The path to transformation is clear and imminently achievable for most. The leaders who take action now are most likely to survive and thrive in the decade ahead.
The asset management industry has reached a turning point that will require rethinking the business model that has served it so well in the past. Market performance has been responsible for 90% of the industry’s revenue growth for nearly two decades. In 2022, however, rapidly rising interest rates caused both stock and bond values to plummet. The result was the second-largest single-year decrease in global assets under management (AuM) since 2005. Global AuM fell by $10 trillion, or 10%, to $98 trillion—near 2020 levels. The net flow rate of assets also fell below 3% for the first time since 2018, reaching 1.6% of total AuM at the beginning of 2022, or $1.7 trillion.
With the collapse of a built-in bull market to support revenue growth, preexisting pressures have been exacerbated:
- Central banks’ policy of engineering market appreciation has shifted to one of slowing growth to combat inflation. The result is that market growth is no longer guaranteed.
- Low-fee passively managed funds have been the primary beneficiaries of market appreciation over the past decade in the US. In addition, the share of passively managed assets in Europe is expected to grow in the next few years.
- Fee compression has accelerated, while costs as a share of revenue have increased.
- Continuous efforts to innovate have led to an abundance of new products, but investors have gravitated to products with established track records. A whopping 75% of global AuM in mutual funds and exchange-traded funds sits in products that are at least ten years old.
The Only Choice Is Change
The fundamental pressures facing asset managers make the point clear: transformation is necessary.
According to our estimates, the existing pressures and market expectations are such that if asset managers simply stay the course, their annual profit growth will be approximately half the industry average of recent years (5% versus 10%). To get back to historical levels of profitable growth, asset managers will need to cut costs by 20% overall and shift their revenue mix to generate at least 30% of their revenue from higher-margin products.
Embrace the Three Ps
In BCG’s 21st annual global asset management report, we explore three themes that should focus leadership’s approach for the future.
Profitability. Asset managers should transform their approach to profitability. They can do this by understanding the drivers of key costs and using multiple initiatives to optimize costs, rather than just slash expenses. (See Exhibit 1.) Such initiatives may include flattening the organization structure; rightsizing support functions; and trimming away subscale and unprofitable products to refocus the business on strong value creation.
Private Markets. Firms should pursue high-growth alternative investments and the private market opportunities therein. These continue to be bright spots for the industry. Alternatives represented more than $20 trillion of global AuM as of year-end 2022. These products also accounted for half of the industry’s global revenues, generating more than $190 billion in revenues for the firms that offer them. This strong momentum is expected to prevail with a CAGR of 7% in alternative assets over the next five years.
For firms aiming to enter the alternatives market, there are four primary pathways:
- Build in-house
- Buy multiple firms and use an affiliate or boutique structure
- Buy an alternatives firm and operate it independently
- Establish partnerships
While each path comes with its own advantages and challenges, the most important characteristics of a successful alternatives unit revolve less around a firm’s method of entry and more around its execution. What is key is that the asset manager perfect the value proposition, tailor incentives to drive growth, preserve the autonomy of the alternatives team, optimize distribution and fundraising, and assure that all parties enter the deal with their strategic interests aligned to the highest degree possible.
Personalization. Asset managers should harness the technologies that make highly personalized client experiences and products possible. (See Exhibit 2.) New technologies can boost personalization efficiency and effectiveness in the sales and marketing process. And if applied correctly, these technologies can lead to an increase in sales conversions of about 20% relative to traditional approaches.
A key personalization product in the US is direct indexing. Similar to the way that streaming services allow music fans to download and mix individual songs instead of buying albums, direct indexing enables advisors and their clients to buy securities one at a time and mix them into individualized portfolios.
Direct indexing technology presents risks but also opportunities. Asset managers should weigh the various strategies for accessing customers with this product: partnering with a vendor, building the capability in-house, or acquiring an existing player.
After years of record growth, the tide has turned. By adopting a transformative mindset and embracing the three Ps—profitability, private markets, and personalization—asset managers can meet investors’ demands and face the future with excellent prospects for growth amid the chaotic economic climate that lies ahead.
Subscribe to our Financial Institutions E-Alert.
protected by reCaptcha
Authors
Chris McIntyre
Managing Director & Partner
New York
Sultan Alsubaihin
Consultant
New York
Simon Bartletta
Managing Director & Senior Partner
Boston
Philip Bianchi
Partner
New York
Joe Carrubba
Managing Director & Partner
New York
Peter Czerepak
Managing Director & Senior Partner
Boston
Dean Frankle
Managing Director & Partner
London
Lubasha Heredia
Managing Director & Partner
New York
Bingbing Liu
Managing Director & Partner
Shanghai
Gleb Margolin
Consultant
Seattle
Michele Millosevich
Principal
Milan
Miftah Mizan
Project Leader
Los Angeles
Edoardo Palmisani
Managing Director & Partner
Rome
Ian Pancham
Managing Director & Partner
New York
Neil Pardasani
Managing Director & Senior Partner
Los Angeles
Kedra Newsom Reeves
Managing Director & Partner
Chicago
George Rudolph
Partner
New York
Blaine Slack
Lead Knowledge Analyst
ACC – Chicago
Brian Teixeira
Project Leader
Boston
Andrea Walbaum
Knowledge Expert, Team Manager
New York
About Boston Consulting Group
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.
© Boston Consulting Group 2023. All rights reserved.
For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and Twitter.
Related Content
What’s Next
Read more insights from BCG’s teams of experts.
BCG’s consulting experts work with leaders in the asset management industry to promote growth, develop innovative strategies, and build competitive advantage.
Report
The most important question facing wealth managers right now is not which initiatives to prioritize—but how best to implement them all.
Report
In a uniquely tumultuous year, assets under management worldwide showed strong overall growth, passing a major milestone along the way.
Report
Alternatives continued to be one of the strongest-performing asset classes overall in 2019, but not all alternatives are created equal.
1 / 4