Asset managers worldwide are preparing for increased financial pressures, with nearly two-thirds (65%) of executives anticipating significant margin compression over the next two years, according to a report by Carne Group.
Traditional asset managers will be the hardest hit, according to the research, facing challenges from rising regulatory demands (58%) and intense fee competition (50%) as clients and regulators scrutinise fees more closely.
The study, which surveyed 200 asset management executives, found that fee pressure, regulation, and high operating costs are combining to erode profitability, particularly for traditional asset managers who expect even greater impact than their peers in alternative investments. “The commercial pressures facing the asset management industry are set to heighten yet again in the coming two years,” said John Donohoe, CEO of Carne Group.
Market volatility, along with fixed technology costs, is also weighing on margins. Around 30% of asset managers surveyed expect market volatility to impact their bottom lines, while 35% cite technology investments as a cost driver. The rise of passive investment products adds additional downward pressure on fees, as traditional managers struggle to keep up with the lower costs of passive strategies. Half of the surveyed traditional managers cited fee pressure as a key factor in expected profit declines.
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Traditional managers are feeling the pinch across asset classes, with equity and bond funds expected to see the highest margin pressures (51% and 52%, respectively) due to competition from passive funds. As a result, nearly 79% of traditional managers plan to cut costs through product rationalisation, with actively managed public funds expected to be the first to go. Multi-asset funds, however, are expected to face slightly less pressure.
Alternative managers are not immune to these challenges, though their struggles differ slightly. High interest rates, despite recent cuts by central banks, remain a barrier for 49% of alternative managers, especially those reliant on leverage. Private equity managers are also finding it harder to exit investments as planned due to the elevated rates. Additionally, a growing “war for talent” has driven wage costs up, with 37% of alternative managers citing high personnel costs as a key near-term challenge.
Amid these pressures, asset managers are increasingly looking to outsource functions to reduce operational costs. Nearly half of firms view outsourcing non-core activities as an effective way to improve margins. For managers running their own management companies, regulatory complexity is particularly burdensome; 51% expect to partially outsource services to third-party managers in the next two years, while 19% plan to fully outsource.
Donohoe added: “We are seeing more CFOs take on CEO roles as firms seek efficiencies and refocus on growth. Nearly $2 trillion of the European funds market is now outsourced to management companies—a 50% increase over five years. This is an exponential growth rate, set to accelerate in the coming years.”
