Despite many years of strong growth, asset managers are facing several disruptive challenges. Matthias Memminger, a partner with Bain's Financial Services practice, explains why firms need to focus on size or differentiation, or else face the risk of extinction.
Read the Bain Brief: After the Easy Money Boom, Stark Choices for Asset Managers
Read the transcript below.
MATTHIAS MEMMINGER: In the last 10 years, the asset management industry has seen tremendous growth. Based on our analysis, we expect this growth to continue in the next three to five years. However, there's going to be several challenges lurking below the surface.
And these are basically the significant shift from high-margin active products to low-margin passive products. Secondly, the pressure from the clients on the fees evolve, which takes a lot of profitability from the industry. And thirdly, the rising cost. And that's mainly driven by regulation and by investments into technology.
So taking these challenges, what we clearly see ahead is there's going to be an inflection point hitting the industry. And there will be some disruption that will change the rules the industry as they are today.
This is already reflected today in the widening gap between the winners and the losers of the industry. So our analysis clearly shows that the winners have double the profitability of the losers. And we actually see that this is going to triple in the next three to five years.
So what can you do about this? There's basically two winning models that we see in the market playing out. The first one is go big. So what you need to do is, you basically maximize the efficiency of your operating model, and the scalability. And then you really start to grow organically, and wire an M&A strategy...on your model.
The second strategy is that you differentiate it. And that really implies that you identify the products and services where you redifferentiate yourself towards the clients, and clients are really prepared to pay a premium for for these products and services. And then you double down investments on those, and you basically grow into a leading boutique niche provider in these areas.
So no matter what's your point of departure or the strategy you choose, there's only one imperative, and that is to start now. Because otherwise, you really face the risk of extinction.
Whether through scale or niche, asset management firms must avoid the collapse of the middle.