Strong Profits Masking Long-Term Challenges
November 28, 2011
The asset management industry's agility following the financial crisis, particularly its ability to improve profitability, is masking long-term challenges to growth, according to McKinsey & Co.
In fact, the top quartile of asset management firms earned an average margin of 46% in 2010. By comparison, the bottom quartile earned a mere 6% profit margin.
On the plus side, McKinsey said, assets under management in the second quarter exceeded those before the financial crisis of 2008, On the negative side, overall industry margins are 15% lower that before 2008-due to escalating costs and increasing pressure on yields.
"With the market proving unreliable in 2011 and 2012, asset managers will need to tackle the business model issues at the center of rising costs, lower prices and high variability of margins in the years ahead," McKinsey said.
"Growth has proven more elusive than profitability, with only one in five asset managers sustaining above-average growth rates over the past decade," McKinsey added. McKinsey recommended that asset managers keen on growing concentrate on:
* Retirement Solutions
* Exchange-Traded Funds
* Emerging Markets
T. Rowe Chair on T-Bond 'Irrational Exuberance'
With yields under 2%, investors' continuing obsession with purchasing Treasury bonds is a sign of 'irrational exuberance,' said T. Rowe Price Chairman Brian C. Rogers. Investors are showing an "irrational quest for safety,'' even given the wide swings this year in asset values, Rogers told a press briefing in New York Tuesday.
Those swings have been driven by events such as the European sovereign debt crisis, but most notably the August polarization of political parties in the United States that first failed to come to terms with the nation's growing deficit and then resulted in the first-ever downgrade of U.S. debt by a major ratings agency.
That move led to four straight days of down, then up, then down, then up movement of more than 4% in the Dow Jones Industrial Average, he noted.
"People are terrified of risk, people are terrified of volatility," he said.
But the yield on 10-year Treasury bonds closed November 21 at 1.97%.
Blue-chip stocks will produce a better yield, Rogers contended. But he did not state a comparative number on what return could be expected.
Retirement Income Driving Annuity Opportunities
Eight in 10 advisers who sell annuities are having more client discussions about retirement income planning than five years ago.
And those discussions are becoming more emotional, according to a report from the Insured Retirement Institute (IRI) and Cogent Research.
Nearly two-thirds (65%) of advisers currently selling annuities indicate that guaranteed income options are expected to increase in importance over the next five years-more so than any other factor.
"Opportunities abound for the financial services industry to not only meet the growing investor demand for insured retirement strategies, but also to develop business practices that support the continued acceptance and use of these products," said IRI President and CEO Cathy Weatherford. "The most important retirement income goal is not running out of money."