Pressure on Europe’s asset managers is growing

D.he wealth management industry is under pressure. According to a study by the strategy consultancy Strategy &, which belongs to the management consultancy PwC, profits in the industry have fallen by 14 percent since 2017, although the assets under management have grown by almost 12 percent. Only one in four asset managers was able to increase their profits, mostly on a modest scale. A not insignificant number of companies were also unable to achieve a low ratio of sales despite lower costs. This points to problems in increasing revenue accordingly. Small, active managers are the most profitable overall, so that size is obviously not always an advantage, according to the analysts at Strategy &.

European asset managers in particular have not had good years recently. Market growth fell from a comparatively low 12 percent on average in 2013 to 2017 in 2015 to 2019 to just 5 percent. The American market, which is more than twice as large, grew by an average of 12 percent in the same period, shows a study by the strategy consultancy ZEB, which specializes in the European financial sector. On top of that, the profit margin of the 44 European asset managers on which the study is based fell slightly – although the assets managed by them actually grew significantly above average compared to the overall market.

The reason was, not least, that the sales growth did not keep pace, in other words: More customer money did not bring as much sales, ergo that also points to a problem on the income side. In addition, higher regulatory and customer requirements as well as the costs of digitization would have prevented greater cost reductions: If the managed assets had not grown, the profit margin would have fallen to just 0.03 percent instead of 0.1, write the analysts from ZEB. For most asset managers, costs also grow faster than revenues.

As is so often the case, medium-sized companies have the biggest problem: not focused enough to achieve higher margins and not large enough for sufficiently high economies of scale. As a result of the corona pandemic, the assets under management this year also fell from 9.4 to 8.8 trillion euros by the end of June. The impact is not yet clear, but ZEB expects profit margins to fall by at least 20 percent by 2025, even if the pandemic does not have a long-term impact on asset growth.

Fixed market structure as a disadvantage

German asset managers have fallen further behind internationally. In the annual “Top 500 Asset Managers Report” of the specialist magazine IPE, Allianz Global Investors are still listed as the fourth largest asset manager, but have lost touch with Vanguard and State Street, while Fidelity and JP Morgan have clearly caught up. The Deutsche Bank subsidiary DWS has slipped nine places to 21st place and at the same time has the second-lowest growth with an increase in assets under management of 26 percent.

The market share of German and Swiss asset managers fell from almost 13 percent in 2012 to just under 11 percent at the end of last year. However, this is only partly due to them, as the state, contribution-financed pension systems and the exorbitant increase in regulations in the past three years have narrowed the growth potential, according to Strategy &.

But the market structure also does the rest. The market in both countries is dominated by network monopolists who tailor their products to a specific clientele. However, it is precisely these companies that have shown extremely weak growth in comparison because they lacked incentives due to their strong position. However, their increasing international loss of importance could lead their customers to question the product and price strategy more strongly. In addition, they are dependent on the customer funds of the affiliated banks and insurance companies. However, these grew even more slowly than the assets under management. At the same time, the network monopolists have above-average costs, which are falling comparatively slowly.

European asset managers should choose either size or specialization, advises ZEB, which sees medium-sized providers in particular under great pressure. Strategy & recommends local providers to expand their offerings and think about product acquisitions, partnerships and open platforms. And, in general, it means reducing costs and driving forward digitization. ZEB believes that all of this is more urgent than ever: The pandemic has not fundamentally changed the situation in the industry, but has accelerated existing trends.

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