Although asset management continues to boom in a low interest rate environment, the profitability of asset management firms is coming under increasing pressure. In a recent benchmarking analysis, we examined current trends and developments in asset management and its implications for German and Swiss asset managers.
The industry as a whole has experienced significant growth in the years between 2017 and 2019, with US asset managers continuing to dominate the Top 20 ranking of biggest firms. In the same time span their German and Swiss peers, however, grew slower than the overall industry average. Additionally, among our sample of 37 asset managers we saw the market share of German and Swiss Asset under Management (AuM) decrease from 25% in 2009 to 21% in 2019.
The industry landscape is also shifting. Growth is in part driven by significant M&A activities, which increase market concentration on both sides of the Atlantic. Continuous net inflows and higher market appreciation in the US are also noticeable.
Compared to our last study that examined the asset management industry from 2012 to 2017, Asset under Management has grown by 12% overall. Despite this positive development, average profits of asset managers per AuM have decreased by -14%. This reinforces the trend of pressurized margins in the industry. Notably, the most profitable asset managers are small and active, with private equity like business models.
We currently see a significant number of asset managers that are unable to translate low operating expenses to a low cost-income-ratio (CIR). Being able to manage costs effectively does not necessarily depend on size, but rather is the result of a focused strategy and diligent execution – two aspects that many in the industry currently seem to lack. An increase of average CIR at decreasing average operating expenses, on the other side, tends to be an indication for pricing or revenue challenges.
We categorized asset managers into four archetypes that reflect their predominant business model: Pure Scale Players leverage global platforms to achieve scale and can therefore provide their services at relatively low cost. Value Chain Integrators also leverage scale but aggressively extend their business along the value chain. The remaining two archetypes focus on specialization rather than scale: While the Network Monopolists’ product offering is tailored to the target client segment, yet broad enough to keep competitors out, Product Innovators are often able to achieve much higher margins through niche, innovative products.
Network Monopolists are the dominant business model in Germany and Switzerland. They tend to be part of a financial services network and thus have close relationships with specific clients. Across the four archetypes that we assessed, Network Monopolists were growing slowest. Reasons for this development may be a low pressure to expand the business or the high and expensive regulatory standards in Europe. Additionally, banks and insurances, which are the primary feeders of Network Monopolists, have also experienced relatively slow growth in recent years. As a result, Network Monopolists and their owners are faced with the question of strategic positioning: What is the indispensable value contribution of an in-house asset manager for a bank or insurance company? And is the parent company prepared to hold on to a captive in the long term, which operates on a higher cost basis and grows more slowly than the overall asset management market?
To act against the current developments, asset managers in Germany and Switzerland could adopt the following strategies:
Naturally, these strategic choices have to be adapted to the individual business model and market.
German and Swiss asset managers currently perform in the lower parts of the league table. They should act quickly to increase their margins, also by introducing widespread cost reductions. Doing so will not place them in the top performing categories overnight, but it will lower the gap to international competitors.
Marc Peiter also contributed to this article.