- Morgan Stanley and Oliver Wyman just published their annual blue paper on wholesale banks and asset managers, and they laid out a stark worst-case scenario for the latter.
- They identify the types of asset managers that are in the worst possible shape heading into a crucial period for the industry, and which are poised to stay afloat.
For asset managers these days, the biggest question is not how to boost fees but how to keep from cutting them. And that poses a huge problem for an industry that has struggled to cut costs during a period of booming markets and growth in assets under management.
According to a blue paper released Wednesday by Morgan Stanley and Oliver Wyman, industry costs have remained stagnant for the past five years. With fee pressure meaning less in revenue per dollar of assets under management, something’s going to have to give.
That’s especially true given the risk of what the authors call “disruption in the distribution layer.” Right now, fee pressures are mounting despite a distribution model for mutual funds that supports higher fee structures.
Funds are often distributed via banks, independent financial advisers, and investment consultants. But the two firms say asset managers could eventually see 50% of their fees evaporate if their distribution shifts to an “Amazon-type marketplace” where funds can reach investors directly. And while it’s admittedly a worst-case scenario, the sheer fact that the discussion is occurring should trouble anyone in the industry.
“Such an outcome would lead to significantly more price transparency and a magnetic pull to a Vanguard-like pricing for active management,” the two firms said.
Vanguard has a 25-basis-point weighted-average fee rate on its $1 trillion book of actively managed assets, which is much lower than in the rest of the industry, according to the report. With that type of downside scenario in play, it raises the questions of who is best positioned to stay afloat and who is most at risk.
Morgan Stanley and Oliver Wyman calculated the drop in fees for various big-money investors in the event that there’s an industry-wide shift toward Vanguard-like fee levels. And some of Wall Street’s biggest names, including Franklin Templeton, Waddell & Reed, Invesco, and Magellan would see reductions exceeding 40%.
So what is a fund manager to do to stave off this possibility? First and foremost, the study’s authors highlight capacity constraint as a key differentiator. They note the relative resilience of firms with strategies built around it and also forecast that those without any will continue to struggle.
The logic here is that managers with a capacity constraint will be able to continue charging higher fees, because of the perceived value-add that helps the strategy to work in the first place.
Second, while Morgan Stanley and Oliver Wyman see data science and artificial intelligence as ways to improve the investment and distribution processes, they see it positively affecting only a handful of firms. So firms unable to adapt to new technologies will also be at potentially grave risk.
Third, and perhaps most important, is the size of the firms in question. The authors note that cost as a proportion of assets under management for large firms is half that of their smaller counterparts, on average.
And to make matters worse for the little guy, they find active outflows for asset managers with less than $100 billion in assets under management have been double the industry average, despite frequent outperformance. This dynamic can be seen in the chart below.
Got all that? If not, Morgan Stanley and Oliver Wyman sum up the final piece of the equation in short and sweet fashion:
“The biggest are better positioned,” they wrote.
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