Investment managers are in for a wave of consolidation the like of which the industry has never seen before.
Several factors are driving this “the largest competitive re-alignment in asset management history,” according to a new report from consulting firm Casey Quirk, which is part of Deloitte. Among them:
- The rise of passive, or index investing, which is much cheaper than actively managed investing, is pushing down fees that asset managers have historically charged their clients.
- Asset managers have already tapped most potential clients, like the baby boomers. At the same time, pension funds, which employ asset managers to invest their money, are shrinking as they start paying out said baby boomers.
- The Obama administration’s fiduciary rule, which, after a testy rolling out and criticism from Trump associates and Wall Streeters, is expected nonetheless to go into effect and to raise compliance costs for smaller wealth managers.
As a result, asset managers are looking for ways to cut costs and find ways to make their businesses more efficient — for instance, by merging with competitors that have “strong distribution platforms,” or access to clients.
Asset managers are also looking to merge with those that have already invested in technology infrastructure that streamlines their back-office operations.
To some extent, we’ve already started to see evidence of this shift. Aberdeen Asset Management and Standard Life agreed to merge earlier this year in a £11 billion deal that would make it the UK’s largest investment firm, drawing questions from government competition watchdogs.
Average deal value for asset manager mergers more than doubled from 2015 to 2016, from $US241 million in 2015 to $US536 million last year, the authors noted.