A shake-out in fund management ‘will set trillions of dollars in motion’

© Dickerson and Hu, Georgia Tech

The North American asset management industry is on the brink of a “once-in-a-generation” shift.

That’s according to a new report out by McKinsey on Wednesday, November 2, entitled “Thriving in the New Abnormal.”

The 42-page report is full of superlatives. The generational shift is the result of five converging trends that “will fundamentally rewrite the rules for success,” according to the report.

Certain segments of active management are “facing an existential crisis after a sustained period of underperformance that has eroded clients’ confidence,” the report said. And new regulations will cause “one of largest shocks to the wealth management industry in over 40 years.”

Here’s how it plays out

The McKinsey report identifies five trends that will shake up the asset management industry, but we’re going to focus on three: the end of thirty years of exceptional investment returns, the shake-up in active management that that leads to, and heightened regulation.

Business Insider has written before about the fact that investment returns are probably going to be lousy for the next couple of decades, and the challenge that presents for fund managers and their investors. According to the McKinsey report, average asset managers will underperform against the backdrop of this new era of low returns, and that will cause a “shake-out,” setting “trillions of dollars in motion.”

Miley Cyrus throws money in the air as she performs at the opening night of her Bangerz Tour in Australia at Rod Laver Arena on October 10, 2014 in Melbourne, Australia.Scott Barbour/Getty Images

How much money? As much as $8 trillion, or 25% of the US asset management market, to be exact.

And where will this enormous sum of money go? Some of it will go to passive funds, but not all of it.

“Put simply, managers that meet client objectives—whether to minimize costs or achieve more predictable outcomes—will capture share of the money in motion,” the report said.

Assets are also increasingly moving into the alternatives sector, which is likely to be one of the “richest asset management growth opportunities in the years to come”, McKinsey said. In particular, McKinsey expects money to flow into the illiquid private market segment and private credit, as traditional managers move to fill the gap created by a decline in bank lending. McKinsey also expects growth in assets that offer “predictability and stability of returns,” such as physical assets like infrastructure.

Then there is regulation. The DOL Fiduciary Rule taking effect April 2017, will be “one of largest shocks to the wealth management industry in over 40 years,” according to McKinsey.

The report said:

“While it applies more directly to wealth managers, the rule will accelerate several current trends in asset management, including the demand for passive strategies and ETFs, the shift from brokerage to advisory programs, the growth of digital advice, and a culling of asset management partners by wealth managers.

“Taken together, these trends represent a once-in-a generation shift in industry dynamics and a rewriting of the industry playbook,” says McKinsey.