Global Asset Management Industry Must Transform to Thrive Amidst Changing Macroeconomics

• Global Assets Under Management Dropped by 10% to 98 trillion in 2022
• Net Flow Rate Also Fell Below 3% for the First Time Since 2018, Reaching 1.6% of Total AUM at the Beginning of 2022, or $1.7 trillion
• Boston Consulting Group’s 21st Annual Global Asset Management Report Explores Three Major Themes that Should Top the Leadership Agenda in the Years Ahead: Profitability, Private Markets, and Personalization

BOSTON—For much of the past two decades, asset managers’ revenue growth has been boosted by central bank policies that have helped drive global markets. But rising interest rates in 2022 caused both stock and bond values to plummet, and the asset management industry also suffered. Global assets under management (AUM) dropped by 10% to $98 trillion, the second-largest single-year decrease since 2005, according to a new report released today by Boston Consulting Group (BCG).

BCG’s “Global Asset Management 2023: The Tide Has Turned,” examines the external and internal forces shaping the asset management industry—outlining fundamental pressures asset managers face—and details a transformative path forward for asset managers to get back to historical levels of profitability growth.

“The asset management industry has reached a turning point, requiring leaders to rethink the way their organizations operate if they want to return to the profit growth of years past,” says Chris McIntyre, BCG managing director and partner, and coauthor of the report. “The markets are full of economic uncertainties, and technology is rapidly transforming the way financial services firms serve their clients.”

Passively Managed Funds Are Increasing Popular, But Growth Varies by Region

According to the report, the share of net flows into passive exchange-traded funds and other passive products in the US roughly tripled to 90% from 2010 through 2022, compared with net flows from 2000 through 2009. In Asia and Europe, passive funds hold only 21% and 20% of mutual fund and ETF assets, respectively, indicating that active management seems to have a safe haven—at least for the moment.

In China and other Asian markets, active managers have been able to deliver better-than-average market returns, thereby outpacing any cost advantages to be found in index products. In Europe, the amount in passive assets is expected to grow more quickly than it is currently in Asia. Along with increasing customer demand, potential regulatory changes could make the climate more favorable for passive management.

Asset Management Fees Are Headed Down

Over the past 10 to 15 years, extraordinary market performance has more than offset the fee pressure on revenue growth and margins—but those days are over. Pricing is increasingly being used as a differentiator not only for passive products but also within the overcrowded space of active products that are otherwise like one another, resulting in persistent downward pressure. Average fees have declined by more than 15% since 2010, a drop that erases $55 billion in revenues (given 2022’s AUM). Adding to the squeeze on profits are cost structures that are unfit for the current environment.

The Current Approach to Product Innovation Is Not Working

While the asset management industry has created an abundance of products to stand out in a competitive playing field, proliferation has not meant meaningful innovation. Investors are increasingly sticking with established products with reliable track records: 75% of global AUM in mutual funds and ETFs sit in products that are at least ten years old. Less than 40% of all products launched ten years ago are still offered, compared with 60% of all ten-year-old funds in 2010.

Transformative Measures to Return to Historical Levels of Profitable Growth

BCG estimates that given the existing pressures and market expectations, if asset managers stay the course, their annual profit growth will be approximately half the industry average of recent years (5% versus 10%). To get back to historical levels, asset managers will need to cut costs by 20% overall and shift their revenue mix to generate at least 30% of their revenue from higher-margin products.

The report outlines three major themes that should top the leadership agenda to survive and thrive in the years ahead:

• Profitability: Asset managers should transform their approach to profitability. They can do this by understanding the expenses and drivers in each function and using multiple initiatives to optimize costs, rather than just slash expenses.
• Private Markets: Firms should pursue high-growth alternative investments and the private market opportunities therein. Alternatives represented more than $20 trillion of global AUM as of year-end 2022 and accounted for half of the industry’s global revenues, generating more than $190 billion for the firms that offer them. This strong momentum is expected to prevail with a CAGR of 7% in alternative assets over the next five years. Firms aiming to enter the alternatives market can do so through four primary pathways: build in-house, buy multiple firms and use an affiliate or boutique structure, buy an alternatives firm and operate it independently, or establish partnerships.
• Personalization: Asset managers should harness the technologies that make highly personalized client experiences and products possible. New technologies can boost personalization efficiency and effectiveness in the sales and marketing process, potentially leading to an increase in sales conversions of about 20% relative to traditional approaches.

Download the publication here.

Media Contact:
Eric Gregoire
+1 617 850 3783
gregoire.eric@bcg.com