playing the long game: global asset management 2006
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Playing the Long G
ame
Playing the Long Game
Globa l Asse t Management 2006
BCG REPORT
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Playing the Long Game
Globa l Asse t Management 2006
ANDY MAGUIRE
FRANS BLOM
NICK GARDINER
JAMES GEDDES
MONISH KUMAR
PHILIPPE MOREL
D E C E M B E R 2 0 0 6
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© The Boston Consulting Group, Inc. 2006. All rights reserved.
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2 BCG REPORT
3
Table of Contents
Note to the Reader 4
Acknowledgments 5
Preface 6
Summary of Key Findings 7
A Snapshot of the Industry 9
The Traditional Core Is Still Being Squeezed 11
The Promise and Challenge of Opening Up 15
Models for Success 16
The Retirement Opportunity 21
The U.S. Retirement Market 23
Retirement in Other Developed Markets 25
Seizing the Opportunity 29
Methodology 31
Appendix 32
Playing the Long Game
Note to the Reader
4 BCG REPORT
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5
Acknowledgments
First and foremost, we would like to thank the asset management institutions that participated in our cur-rent and previous research efforts, as well as other organizations that contributed to the insights in Playingthe Long Game: Global Asset Management 2006.
Within BCG, our special thanks go to Paul Brandenburg, Valeria Bruno, Philip Crawford, Andrew Dyer, IanFrost, Jonathan Hekster, Kosuke Kato, Huib Kurstjens, Paul Orlander, Claudia Pösinger, Ignazio Rocco,Simon Stephenson, Robert Stubbs, Sven-Olaf Vathje, and Andrea Walbaum.
In addition, the report would not have been possible without the dedication of many members of BCG’sFinancial Services practice, including Victor Aerni, Brad Baker, Rohan Chandler, Anthony Cheong, SvilenIvanov, Alex Leimbach, Mats Lindh, Michaël Niddam, Toby Owens, Walter Piacsek, Nick South, HarukoTakano, and Susannah Wesley.
Finally, grateful thanks go to members of the editorial and production teams, including Katherine Andrews,Gary Callahan, Kim Friedman, and Sara Strassenreiter.
Playing the Long Game
Andy MaguireVice President and Director
Nick GardinerProject Leader
Monish KumarVice President and Director
Frans BlomSenior Vice President and Director
James Geddes Consultant
Philippe MorelSenior Vice President and Director
Preface
6 BCG REPORT
Playing the Long Game: Global Asset Management 2006 is The Boston Consulting Group’s third study of theworldwide asset-management industry. Our last report, A Restless Recovery: Global Asset Management 2004,involved detailed benchmarking of leading industry competitors, using data on fees, products, distributionchannels, and costs to draw insights into the state of the industry and the underlying drivers of profitability.We return to many of the same themes in this report. Yet this time, recognizing that the pace of corporatechange rarely creates dramatic shifts over a two-year horizon, we have concentrated primarily on research.
The first section of this year’s report addresses overall trends in the asset management industry, offering abottom-up view of the size and composition of the global market and of its evolution over time. The scopeof this study is broader than that of the previous ones, encompassing 28 national markets across NorthAmerica, Western Europe, and Asia-Pacific. As in the previous studies, we have focused exclusively on assetsthat are professionally managed in exchange for a fee.
The second part of the report is an in-depth examination of the issue of retirement and the opportunitiesthat will arise for asset managers as the baby boom generation in North America and Europe departs fromthe work force over the next two decades. Although we are less bullish than many industry observers regard-ing these opportunities, we do believe that, for the right competitors under the right circumstances, signifi-cant potential exists.
We hope that this report and its sister publication, Taking the Client’s Perspective: Global Wealth 2006, publishedin September 2006, will engage readers and prompt asset managers to reflect both on the implications ofcurrent industry dynamics for their businesses and on the importance of strategies that look several gener-ations ahead—in other words, strategies that involve playing the long game.1
1. When it comes to market sizing, BCG’s Global Wealth report uses a broader definition of assets that includes asset classes and revenue sources, includ-ing net interest income, that are relevant to wealth managers. Market totals in the two reports therefore vary considerably. See the Methodology on page 31.
7
Summary of Key Findings
The value of professionally managed assets—thosefor which a management fee is paid—grew byaround 15 percent globally to $49.1 trillion in 2005,with capital inflows driven largely by growth inEurope and the Asia-Pacific region. Assets undermanagement (AuM) in both Europe and Asia-Pacific grew by more than 20 percent in nominalterms, compared with 9 percent growth in theUnited States.
• The United States currently accounts for lessthan half the world’s AuM (46 percent), althoughit is still by far the largest single market, withmore than $22 trillion in AuM.
• The value of global AuM remains fairly evenlysplit between retail business (46 percent) andinstitutional business (54 percent), with substan-tial variation by country.
The traditional core businesses of actively managedequity, bond, and money market funds continue tocome under pressure. Although revenues haveshowed relative stability since 2004—around 45 to50 basis points of AuM for equity funds, and 15 to20 basis points for bond and money market funds—asset growth across the core is expected to remainin the middle single digits over the next few years.
• Asset growth is expected to be much stronger innoncore products. These include commoditizedproducts such as index funds and exchange-tradedfunds (ETFs), and alternative investments such ashedge funds and private equity. Hedge funds—with revenues in the 150-to-200-basis-point rangeand AuM (currently more than $1 trillion)expected to increase at a compound annualgrowth rate (CAGR) of 15 percent through 2010—are becoming more mainstream as minimuminvestment requirements gradually decline.
• Corporate-development and merger-and-acquisi-tion activity is on the rise as various players seekto realign their businesses to gain better distribu-tion, greater scale, and more advantageous prod-uct and client portfolios.
There are clear distinctions between the economicsof institutional and retail players, with retail players
tending to have a higher-revenue, higher-cost busi-ness model. In 2005 average net revenues for insti-tutional players were 14 basis points, comparedwith 38 basis points for mixed players and 46 basispoints for retail players.
• In contrast to the United States and the UnitedKingdom, where independent distribution isprevalent, almost all European asset managers areintegrated with a larger parent organization (typi-cally a bank or an insurance company) and oper-ate mainly through captive distribution channelsthat sell mostly proprietary products. Europeanasset managers are likely to move toward moreopen models with the goal of raising margins.
• Although domestic players in continental Europecurrently account for 85 to 90 percent of institu-tional mandates, we expect to see an increas-ing proportion of assets assigned (through sub-advisory mandates) to specialist and interna-tional managers.
In order to raise their level of overall competitive-ness, asset managers need to focus on critical ini-tiatives. Such initiatives include optimizing distri-bution channels, fostering investment managerautonomy, developing more specialized segmentand asset-class expertise, gaining scale, trimmingcosts, and finding new ways to innovate.
• A highly disciplined approach to distributionremains crucial, particularly as power continues toshift away from manufacturers toward distributorsand intermediaries (such as independent financialadvisers) that control the customer relationship.
• For retail mutual funds, innovation and market-ing may be just as important for generatinginflows as past fund performance is. Generally,newer funds tend to attract a higher flow of assetsthan more established funds do. Players with asharp product focus are more likely to delivermeaningful messages about their offerings and tobetter align their resources with the channels andcustomer groups that are most receptive.
The United States is the most attractive retirementmarket for asset managers. The roughly 71 million
Playing the Long Game
U.S. baby boomers in the 40-to-59 age bracket con-trol an estimated $8.4 trillion. The 60-to-69 agebracket (17 million strong) controls an additional$4.2 trillion.
• The main opportunity for asset managers is cap-turing funds as they shift from one type of invest-ment to another (such as rollovers from defined-contribution and defined-benefit plans into IRAsor annuities). The annual flow potential of moneyin motion in the United States is about $1.5 trillion.
• Yet rollover assets may be difficult to capture ow-ing to the durability of adviser relationships.High-net-worth customers in their fifties have typ-ically been with their current adviser for ten ormore years, and the majority say they wouldremain loyal if the adviser switched asset manage-ment firms.
Public-policy reforms in Western Europe are pro-ceeding slowly, so reliance on state programs forretirement funds remains high—meaning lessopportunity for asset managers. Also, the econom-ics of retirement-oriented annuities and insuranceproducts are often unattractive from both the man-ufacturers’ and the customers’ standpoint.
• European retirement markets could improve witha resurgence in unit-linked and related invest-ment vehicles that offer greater exposure to mar-ket risk. These vehicles will likely be similar toU.S.-style variable annuities that offer variousbenefits and guarantees. A number of govern-ments are providing incentives for investors to trysuch offerings, but consumer resistance remains
substantial following sharp losses in the postmil-lennium downturn.
• In other major markets such as Australia, Canada,and Japan, competition is highly concentratedamong the top four or five players. The mainopportunities lie in developing targeted salesforces and scalable platforms.
Asset managers should concentrate on several ini-tiatives to improve their competitiveness in themarket for retirement assets. These actions includekeeping up with the regulatory climate, redefiningthe product portfolio, broadening advisory capabil-ities, investing in the customer experience, plan-ning for the succession of advisers, and sharpeningrisk management capabilities.
• Clients approaching or already in retirement arelikely to seek advice on a broader range of issues(including health insurance and inheritance)than many asset managers are able to handle.Players should invest to fill knowledge gaps andinitiate dialogue early in order to be crediblypositioned as retirement approaches.
• Asset managers should revisit both the messagesthey use to attract customers and the service lev-els they offer in order to keep those customers.Messages linked to a positive emotional payoff—such as a feeling of freedom and the ability tohave a beneficial impact on heirs—are more likelyto attract and maintain relationships than thosethat play on fears and anxieties. Also, retentionmechanisms for top advisers deserve the samelevel of attention as customer acquisition does.
8 BCG REPORT