Advisors Looking to Expand Revenue
July 17, 2006
Investment managers are positive about the future and are focused on revenue expansion rather than cost cutting, according to the "Global Investment Management Survey" from PricewaterhouseCoopers. The study, based on interviews with chief executive officers from 81 firms around the world with assets of $9 trillion, found that 55% of CEOs believe their revenues will increase by 20% or more over the next three years. This is in stark contrast to the study findings three years ago, when chief executives were looking to cut costs.
"There is continued growth and optimism for entering new markets. Firms are looking at how to retain and expand their customer base, and not highlighting cost reduction," said John Stadtler, a partner in the global investment management practice at PwC.
However, there will be challenges to face, most notably distribution, compliance and competition. Chief executives are aware that they need to expand their distribution of existing products in both established and new markets. However, 23% surveyed labeled themselves as inadequate in the area, attributing their lack of confidence in expanding distribution to further consolidation expected among banks, financial advisers and multi-managers. As consolidation continues, asset managers are conscious that their proprietary products may be handed over to another company.
The Internet is viewed as an emerging distribution channel for retail investors outside the U.S., while domestically, more investors are expected to manage their mutual fund holdings online. However, there is concern that as banks and brokers consolidate and the Internet becomes more popular, larger distributors will be in a position to demand higher fees.
U.S.-based companies will have to leverage their distribution platforms and strengthen distribution beyond their current geography, Stadtler said. Sixteen percent of chief executives stated they would enter new markets over the next three years, many of them citing distribution opportunities outside the U.S. Two global regions of particular interest are Asia and Australia, since they are developing countries with growing middle classes. Firms will look at cost options of either starting businesses there or having a third party cover the area.
Regarding competition, chief executives of small firms with assets of less than $10 billion said they were at a disadvantage with regard to distribution. Medium-size firms, with assets of $10 billion to $50 billion, cited their primary weakness as their product range. Across the board, firms believed the greatest strength they had over their competitors was their service and quality of their employees.
Investment managers intend to remain competitive by developing new products, which may include equity and fixed-income products, hedge funds and products specifically designed for retirement. Traditional products will continue to remain in the forefront. Chief executives predicted equity will command 41% of assets under management, fixed income 29% and hedge funds 10%.
Many investment managers are preparing for the Baby Boomers to retire, which could happen in two to three years. "Mutual funds have to have innovative products designed for retirement and investment," said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I. "Managers are guessing what clients' needs may be and how to price them competitively, as no one knows what the Baby Boomers want."
Increasingly, investors are looking for products tailored to their investment needs. It would be beneficial for investment managers to tailor investment products to customers' savings goals, such as retirement, college funding and estate planning, the report showed. Additionally, clients' demographics should be taken into consideration.
Regulation is also expected to have a major impact on revenue expansion, with 23% of chief executives seeing regulatory changes as the greatest and most immediate challenge. Regulation is an added cost of doing business in the U.S. and it has hurt bottom lines without benefiting investors or the market, survey respondents said. Chief executives do not believe that regulation has increased investor confidence, and 43% do not think it has improved cross-border competition. Regu
lation is not likely to decrease as the government realizes the important role the investment management industry has to help people save money.
Investment performance is at an all-time high, and institutional clients are examining performance attribution and investment processes more closely than ever. "Fund families have lost the ability to control the client relationship, as it has gone to brokers, and the industry has to win over clients by performance and maintaining performance," Bobroff said.
Institutional investors are evaluating performance by differentiating alpha from beta with increasing sophistication. Investors are becoming analytical when judging the sustainability of performance.
Retail investors, on the other hand, are not becoming more sophisticated and tend to buy the newest hot performers and stick with them. Brand image and quality of distribution arrangements along with performance, the CEOs said, are important factors in increasing retail sales.
Outsourcing trends are expected to continue, with firms around the world outsourcing their back-office functions, such as fund accounting and custody work. Outsourcing is considered popular because it allows firms to concentrate on core competencies, despite thoughts that cost savings is the primary reason.
(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.