Only financial advice margins have held up over the last five years as fee and cost pressures squeezed profits across the investment industry, a joint study by FNZ and the Boston Consulting Group (BCG) has found.
According to the report, margins for providing advice remained steady at 0.72 per cent from 2017 to the end of last year while sliding for those who offer investment products (both active and passive), model portfolios and asset servicing.
“… product fees have been hit by fierce competition and increased cost transparency— with declines of 11% for active funds and 35% for passive funds since 2017,” the paper says.
And while active investment margins remain high at 1.25 per cent, the study suggests the sector will face ongoing pressure as index funds march on and product commission phase-outs hits some European markets.
“Increasing competition is also visible in the declining margins on model portfolio services provided by wealth and asset managers (down 12% since 2017),” the FNZ/BCG report says. “Finally, asset-servicing margins for clients with more than $2 million have decreased by 16% since 2017, reaching as low as 12 basis points for typical wealth management mandates—a decline driven by technology, scale economies, and increased transparency.”
Falling profits for investment providers have come, too, amid increasing client demands for customised, efficient services that will eat further into margins.
“We expect some of the most substantial outlays to be in several areas, such as hybrid advisory (supported by seamless omnichannel capabilities), direct indexing (allowing replication of indices on individual portfolios in a tax-efficient manner), and managed portfolio services (allowing for higher levels of personalization than with traditional approaches for a large investor population),” the paper says. “In addition, clients are increasingly demanding full transparency of their investments in order to ensure full alignment with their personal values and goals (e.g., sustainability).”
Investment and wealth management firms will have to upgrade technology to meet client expectations either by bolstering in-house capabilities, adopting a ‘best-of-breed’ approach that mixes several solutions or taking the end-to-end route via a single outsourced provider.
Each method will have different pros and cons depending on the size and structure of individual firms but the report notes the investment industry overall has increasingly sought external help with the inevitable tech upgrades.
“The share of third-party technology spend has risen by more than 10% since 2018 across both run-the-bank and change-the-bank initiatives at wealth and asset management firms,” the study says.
Of course, as an end-to-end auteur, FNZ advocates for the fully outsourced model, which Akin Soysal, BCG partner and report co-author, says “can yield benefits and create competitive advantage if done right, despite running counter to certain long-established practices”.
The study sampled data from 33 large fund managers and 20 wealth management firms across Europe and North America as well as input from other jurisdictions including NZ.
Founded in Wellington 20 years ago, the now London-headquartered FNZ boasts more than US$1.5 trillion under administration and 6,000 plus employees.