Goldilocks has left the building but consultancy firm, Oliver Wyman, is not forecasting a bear market for the global funds management and financial advisory sectors over the next five years.
If not quite bullish, the latest Oliver Wyman annual review of the asset and wealth management industries – produced in association with Morgan Stanley – is relatively upbeat on the medium-term prospects for both overall.
While the 15-year post global financial crisis calm has ended with a bout of high inflation, increased volatility and rising geopolitical tensions, the study suggests fund managers and advisory firms, especially those that adapt fast to new conditions, will weather the storm.
“Despite these headwinds, we expect that the asset and wealth management industries will continue to be among the most profitable in the financial services sector, generating relatively attractive returns on equity (RoE),” the paper says. “However, the combination of lower top line growth and a stubborn fixed cost base that threatens to rise faster than revenue highlights the fragility of the industries’ operating model, where every future market downturn will be that much more punishing.”
Over the five-year period from 2022 to 2027, Oliver Wyman forecasts total “externally managed assets” for fund managers to grow at an annualised rate of 7 per cent – or 3.6 per cent if measured from the 2021 peak – with private markets the key driver.
“As a result, we project industry revenue to grow at a slightly slower pace of 5.2% versus 7% of AuM [assets under management] for the same period, but with a pronounced shift toward private markets and select hedge fund strategies, which will constitute more than half of the total revenue pool of the industry by 2027,” the report says. “We expect retail/wealth growth to continue to outpace institutional at 7.9% vs. 5.5%, propelling it to over 60% of global third-party man-aged AuM by 2027.”
Passive funds should also gain at the expense of active, particularly in ‘core’ asset classes, likely breaching the 50 per cent market share level sometime during the five-year period.
But with flows between actively managed funds currently occurring at three-times the rate compared to the money flowing into indexed products, well-positioned active managers stand to reap the benefits.
Long-standing trends such as fee compression, changing investor dynamics and technology changes will continue to put pressure on asset management operating models, the paper says, with businesses able to shift four ‘levers’ to cope, including “de-scoping, organizational effectiveness and simplification, workforce management, and third-party cost management”.
Many fund managers have already flagged cost cuts of 5-15 per cent but Oliver Wyman suggests savings in the order of 20-40 per cent might be possible for firms “by making difficult choices to trim their structural cost base”.
And with global wealth tipped to grow 6 per cent annually over the next five years, the report says financial advice should also be in high demand.
In particular, wealth management firms are set to benefit by focusing on the high net worth and family office sectors but the mass-market also offers opportunities as the defined contribution (DC) retirement savings sector (such as KiwiSaver) blooms, according to Oliver Wyman.
“Given the vast amount of assets managed at DC globally ($16 trillion) the opportunity to deliver financial advice is very large,” the report says. “We see a set of models suitable for this segment, from digital advisory models to serve mass and mass-affluent clients, which can generate $12-18 billion in annual revenue, to hybrid and full-service offerings for affluent or wealthier clients, which can bring $60-80 billion in annual revenue.”
Oliver Wyman, part of the Marsh McLennan group that also houses Mercer, also highlights the rapidly growing opportunities and risks presented by ‘generative’ artificial intelligence (AI) for both asset managers and financial advisory firms.
“Gen AI isn’t a separate growth driver in itself. It has the potential to supercharge efficiency gains across the operating model, which can free up even more resources to invest in profitable growth areas,” the study says. “While the technology underlying Gen AI has been around for several years, we believe we are now at a ‘tipping point’ in terms of its ability to be deployed on a widespread basis across asset and wealth managers.”
The report flags 25 ‘use cases’ for the hyped-up AI technology across the asset management value chain and a further 22 potential uses in financial advice businesses.