Asset managers expect it will take four to seven years to recover the assets under management lost during the economic crisis, according to a study by McKinsey & Co.
Profitability will continue to decline and firms will need to cut expenses by as much as 25% to 40%, the New York management consulting company said in the study, released Wednesday. The company said this is more than twice the 10% to 15% cost reductions that asset management companies have budgeted for this year.
"More firms will need to begin fundamentally restructuring their costs," David Hunt, a senior partner for McKinsey and co-head of its wealth and asset management practice, said in an interview. "We are in for four to seven years before assets under management catch up to where they were, but despite this, few have taken action to lower costs."
Hunt said many asset managers have been lulled into a false sense of safety because average assets remained "relatively high" last year before "falling off the cliff in the fourth quarter." He said profits will be "off by a third or a half" this year.
Though some companies have already made some efforts to reduce compensation, most "are only just starting to take a more disciplined approach to transforming costs."
The study, which polled more than 100 asset management firms that collectively manage more than $9 trillion of assets, said firms are beginning to make a broader effort to reduce costs, but Hunt said to "survive and thrive," asset managers will need to look for ways to strategically develop their business as markets recover.
"You can't cost cut your way to success," he said. "To separate the winners from the losers, companies will have to find ways to invest in order to capture growth … even as a large portion of the industry won't see little more than growth beyond asset appreciation. We are about to move from a decade of enormous growth in every sector to a time where we'll only see growth in a few areas."
Asset managers that use the next few years to hire and develop certain business segments could benefit down the road, Hunt said. "The good news is we have never seen such an attractive market for talent," he said. "We had a bit of a brain drain over the past couple of years. Now, things are moving back the other way."
Hunt said he expects a "real pickup" in mergers and acquisitions as banks and insurance companies look to raise capital by selling asset management units. However, that doesn't mean the business will shrink to a handful of companies.
"There will be a variety of small players, multi-boutique firms, and large players," he said. "I don't think we are going to get to just a small number of large firms."
Pure-play asset managers — companies that are not owned by banks or insurance companies — manage 63% of assets, according to the study, up from 36% in 1998. Over the past five years, assets managed by small independent firms have increased 64.8% to $1.632 trillion, it said.
"Asset management will continue to become separate and independent from large firms," Hunt said. "That is an important change and will have implications for insurers and banks."
Some banks may be divesting asset management units, but even they will continue to be an important channel for distribution, he said.
"Offering asset management products will remain core to what banks do," Hunt said. "Now they will be the packagers. Banks have to learn how to manage asset management firms."