Nothing is certain except death, taxes and further fee compression…
Benjamin Franklin is credited with coining the phrase “nothing is certain except death and taxes.” One of the main lessons learned by the asset management industry in 2016 was that Franklin’s observation still resonates. In the 2017, the many headwinds that firms must navigate share an element of uncertainty with a sole exception ─ fee compression. In other words, one thing is certain this year: fees will continue to fall.
The new norm…
When we look for trends that characterized the industry over the past year, one clearly emerges. On a constant basis, market participants see reduced fees across their suite of products. From boutique firms offering only niche strategies to the industry’s largest players, fee cutting was a continuous and recurring headline. We expect that the race to increase market share through slicing fees will continue.
To that end, asset managers should prepare to succeed in this new norm environment. For that reason, firms should have a strategy to combat these pricing tactics or they may risk falling behind their peers.
How to survive…
Asset management firms could benefit from leveraging the framework Nirmalya Kumar published in the Harvard Business Review more than 10 years ago. In doing so, three strategies could emerge:
1. Emphasize Product Differentiation
2. Establish a Dual Product Strategy
3. Transition to a Low-Cost Model
Emphasize Product Differentiation
Ultimately, investment performance could drive differentiation. The ability of a firm to garner a reputation as a consistent alpha producer could be a competitive advantage. However, in this new norm, even the “alpha factories” are being forced to cultivate new capabilities and expand offerings.
Going forward, asset managers will be forced to justify their fee structures by clearly demonstrating value. Leading firms could be providing clients with deep industry research, new solutions, enhanced delivery platforms and richer, more positive experiences. In fact, there are many things firms could learn from Silicon Valley companies which, for years, have tailored their products to differentiate them from competitors; consider the enormous success of Amazon, Apple, Netflix and Uber.
By creating a more holistic solution and engaging clients via social media and a unified client-centric platform for seamless transitions between touchpoints, asset managers could be able to better align their fees with the value they provide. In these ways, they could protect their market share.
Establish a Dual Product Strategy
Over the past 10 years, the asset management industry has experienced a profound secular shift as active funds have lost market share to low-fee, passively managed funds. While actively managed funds still represent the majority of assets under management today, the market share of passive products is likely to grow further.
Accenture sees the shift to passively managed funds as an opportunity for nimble asset managers to create a passive product offering to complement their active line. Firms embarking on this dual strategy must confirm their passive offerings add incremental value; after all, competing head-to-head with larger established players will still be difficult. Leading firms could seek to leverage more sophisticated offerings (niche strategy) and provide tools to help educate clients and enhance their experience.
Pivoting to a dual strategy could help firms grow and invest in their traditional business. At the same time, they could generate additional top line revenue, which otherwise would not have been available.
Transition to a Low-Cost Model
Some firms might decide to transform their business to focus on offering low-cost products. Implementing this strategy is not easy; however, it has been executed successfully in other industries. Ireland’s Ryanair is an excellent example; it changed from a traditional airline into a low-cost carrier. Asset managers that choose to transform into a low-cost provider must be willing to develop new capabilities while sun-setting components of their existing business.
In our view, innovations, such as cloud computing and robotics, could make this transition both attractive and more easily achievable than ever before. By using these and other technologies, asset managers embarking on this approach might win on cost and reap the benefits of increased market share.
Downward pressure on fees is the new norm in the asset management industry. In 2017, firms should dedicate a considerable amount of time, energy and resources to responding to this trend and to aggressive pricing tactics. For some, the impact on business could be minimal; others may have to make strategic investments in both people and technology. Regardless of a firm’s position in the marketplace today, leadership teams need to embrace the new norm. In this way, they will position their firm for sustainable growth. Nirmalya Kumar, “Strategies to Fight Low-Cost Rivals,” Harvard Business Review, December 2006.