The Roar Of The Crowd: How Individual Investors Transform Competition In Asset Management – CaseyQuirk by Deloitte

Summary

Individual investors represented 90% of the asset management industry’s net new flows in 2014, and will account for nearly 120% going forward, as annual organic growth rates shrink below 2% by 2020.

Individual investors will change the asset management industry in four profound ways:

  • Products: a focus on outcomes will help fuel more than $3 trillion of demand between now and 2020 for multi-asset and benchmark-agnostic strategies worldwide, partly funded by redeeming active benchmark-oriented products.
  • Services: at least 70% of U.S. financial advisors want more investment-oriented, resource-intensive advice from asset managers, a sentiment reflected globally.
  •  Productivity: distributing to individuals is at least one-third less efficient than selling to institutions, reducing industry leverage.
  • Regulation: policymakers worldwide will call for objective and discretely priced investment advice, re-arranging economics for asset managers.

Individual investors will encourage disintermediation, an opportunity and threat for asset managers: assets under fully integrated investment advice have grown nearly twice as fast as traditionally intermediated assets since 2008.

Rivalry over individual investors has intensified, reducing fee rates 8% since 2012:

  • Nearly 20% more asset managers supply the industry, yet less than half are gathering new assets.
  • Wealth managers, banks and insurers secured 75% of new wealth created since year-end 2012.

To win individual investors, the industry’s most powerful players will need to compete differently by embracing any of four new competitive differentiators, potentially as innovative technologies:

  • Product development
  • Brand
  • Specialist engagement
  • Risk management

Differentiated firms that keep growing will become more valuable, as shareholders attribute more than 70% of an asset manager’s franchise value to expectations regarding its future organic growth.

Introduction

Asset management remains a vibrant, lucrative financial services industry, but it already shows signs of maturing, including more fee pressure and less operating leverage. Increasingly the same competitive dynamics that shape other financial services industries will affect asset managers: intensifying rivalry among too many players with similar value propositions, resulting in consolidation and disruption.

Winning asset managers will adapt to compete effectively in this environment, using scale and skill to attract attention from the industry’s new source of organic growth: individual investors. This white paper explains four key conclusions about the asset management industry’s future:

  • Individual investors increasingly represent the bulk of organic growth, reshaping opportunity.
  • Individual investors also redistribute the industry’s economics, transforming the operating environment.
  • The new operating environment’s tougher conditions heighten competition between existing players and new entrants, including other financial services firms.
  • Successful asset managers will win with clearly differentiated value propositions, rather than relative outperformance.

Shifting Opportunities: How Individual Investors Reshape Demand

The asset management industry’s economics remain highly attractive. Revenues and operating profit margins touched all-time highs in 2014, and despite market volatility should remain favorable in 2015.

Asset Management, Individual Investors, Competition

But the industry is maturing. Buoyant capital markets in 2014 provided 78% of revenue expansion. Organic growth–new assets reaching the hands of professional money managers–is receding. Since the beginning of the decade, annual organic growth in industry assets under management has slowed to 2% from more than 6% posted before the global financial crisis of 2008-09. New growth will further diminish before 2020.

Asset Management, Individual Investors, Competition

Two major secular trends will slow the industry’s organic growth:

  • The end of a 30-year moderation in interest rates. Higher risk-free rates will make substitute fixed-interest savings vehicles–such as deposits and annuities–more attractive. Regardless of when (or if) rates rise again, in most developed asset management markets they cannot sink much lower.
  • Shifting demographics. The number of retirees in developed markets will continue to surge, forcing pension funds and other retirement savings vehicles to de-risk and shift from accumulation strategies to income provision.

More importantly, changing demand factors are redistributing organic growth opportunities within asset management. The most tectonic change has been the shift in demand to individual from institutional investors worldwide. In 2014, individuals represented more than 90% of net organic growth; for the rest of the decade, they will account for all of it, absorbing a significant amount of net redemptions from institutions.

Asset Management, Individual Investors, Competition

The catalysts for this shift are also secular and powerful:

  • Retirement. As baby boomers in developed markets enter retirement, retirees are withdrawing their accumulated savings from institutional investors. The global rollover marketplace will shift most investment decisions back to individuals.
  • Sovereign fund dynamics. The post-crisis capital shifts that created sovereign funds in emerging markets have stabilized, and the falling price of oil has shrunk petrodollar-driven state investment pools.
  • Insourcing. The cost-benefit of third-party asset management has become less obvious to very large asset owners, many of which can hire their own portfolio managers and install systems to run passive portfolios in-house. Insourced assets among institutional investors globally will grow more than three times the overall industry growth rate.

The shift in power from institutional to individual investors reorients the long-term distribution priorities of asset managers. But it also has deeper impact on the industry’s economics: asset-gathering becomes more expensive. While defined benefit plans and sovereign funds may now be slower-growing, they are all members of a club of sophisticated investors seeking opportunities worldwide. Consequently, they largely evaluate and purchase asset management products and services similarly. But the best sources of organic growth among institutional investors for the near future–insurance portfolios and defined-contribution retirement systems–have different buying dynamics, demanding more expensive regulatory compliance and detailed reporting.

More importantly, individual investor demand is more fragmented, eroding the industry’s scalability–a principal driver of its favorable economics. For asset managers, creating leverage in acquiring and servicing individual investors worldwide is elusive, given how local customs and regulations shape demand differently by region. European and Asia-Pacific individual investors–currently the world’s fastest-growing customer bases for asset management–represent particular opportunities and challenges.

Asset Management, Individual Investors, Competition

See the full report below.