Asset Management Is in Trouble If This Is Its Proposed Salvation

(Bloomberg Opinion) -- The list of challenges facing asset managers today is deja vu all over again from years past: downward pressure on fees, customers switching to low-cost passive products, and increased regulation. But now, one of the balms previously proposed to soothe the industry’s pains — achieving economies of scale by bulking up — seems to be falling out of favor.

McKinsey & Co. this week published a report on the European asset management industry with the title “Adapting to a new normal.” As befits a document produced by one of the world’s leading management consultancies, the study is littered with gobbledygook phrases about the benefits of “alignment of clear value propositions;” the need for “proactive and bold actions;” the prospects for “unlocking vectors of new growth;” and the demands to “seek a new narrative.”

But nowhere in the report, which runs to about 2,500 words, does McKinsey recommend mergers and acquisitions as providing a potential path to salvation.

That’s new. In 2018, Bain & Co., which competes with McKinsey in selling strategic advice to companies, opined that medium-sized firms faced a “valley of death” in the coming half decade that would force them to seek refuge in size via M&A. In 2017, the Boston Consulting Group came to much the same conclusion, albeit with the caveat that “growth through acquisition is a winning formula only if it achieves or consolidates a winning business model.”

The perceived shortcomings of the two big mergers seen in the global asset management industry have clearly prompted a rethink about consolidation among the industry’s leaders, as well as its hangers-on.

Both of the new creations —  Standard Life Aberdeen Plc and Janus Henderson Group Plc — have suffered big customer outflows in the quarters following their transformations. The difficulties of merging different cultures in businesses where the key assets walk out of the door at the end of the business day proved tougher than anticipated.

“We should all be more nervous, more anxious and have a greater sense of urgency,” Michelle Seitz, who oversees about $300 billion as the chief executive officer of Russel Investments Group, said about the asset management industry last month. “I don’t believe M&A is a panacea. If you have two troubled companies, putting them together means that you have bigger problems than you did before.”

The McKinsey report does make one reference to previous industry consolidation, but only in the context of pointing out the “sustained” fragmentation seen among asset managers in the past decade or so. It found that while funds at both the lower and upper ends of the spectrum have grown in average size, those in the middle have seen a decline in average assets to 294 billion euros ($323 billion) from 315 billion euros in 2007.

McKinsey expects European asset managers to garner net new money of just 1.5% this year, better than last year’s 0.2% growth but just half of the expansion the industry enjoyed in 2017. And while assets under management will grow to 22 trillion euros from 20 trillion in 2018, the profit pool will remain static at 17.5 billion euros.

Moreover, that dismal outlook is reflected globally, with worldwide industry growth in assets under management, inflows and profits all expected to slow in the next five years.

Parsing the verbiage, the McKinsey prescriptions for remedying what ails asset managers are unsurprisingly commonplace. Improving customer service, adding more sustainable investing products and becoming more efficient in order to cut costs are universal panaceas, applicable to just about any industry.

Meantime, the final recommendation the consultancy firm lists — “taking the lead in using distributed ledger technology” — smacks of desperation. The blockchain is widely derided as a solution in search of a problem. If that’s the most original idea the consultants have on offer, the future of the asset management industry is truly bleak.

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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