Industry outlook from PwC details continuing shift as regulation on fee models and disclosures spreads
Active management will remain as a core component of portfolios, especially as assets continue to flow and boost a full spectrum of styles and strategies. But don’t expect a uniformly rising tide across the investment-industry ocean.
“[T]raditional active management will grow at a less rapid pace than passive and alternative strategies, and the overall proportion of actively managed traditional assets under management will shrink,” PwC said in a report titled Asset Management 2020: A Brave New World.
The report predicted that come 2020, passive products and alternatives, primarily hedge funds and hedge fund-like products, will represent 35% of total assets managed globally by the industry.
Passive investments are projected to reach US$22.7 trillion in global AUM by 2020, nearly three times the US$7.3 trillion that PwC estimates was held by passives in 2012. Assets in alternatives, meanwhile, are expected to reach $13 trillion next year, around twice its estimated 2012 record of US$6.4 trillion.
PwC projects US$66 trillion will be held in active mandates globally by next year, up by approximately 31.5% compared to a base of US$50.2 trillion in 2012.
“Arguably, there has been a barrier for the active managers because of the regulation from [the UK’s Retail Distribution Review] and MiFID II in Europe,” the report said, referencing initiatives that seek to prohibit asset managers from allocating fees to distributors.
Most asset-management markets across the globe still operate in a model that embeds distribution and management fees, the report noted, arguing that the model misaligns the objectives of the distributor and the investor. By 2020, it predicted, virtually all major territories with distribution networks will have regulation in place that aligns interests more toward the end-customer’s favour, mostly via some form of prohibition on asset managers’ allocating to distributors.
Aside from further opening up the market for passive and low-cost products such as ETFs, the shift in regulations and consequent change in fee models will have several ramifications. There will be an increased use of different models for the mass affluent; retail investors will be increasingly relegated to self-directed service platforms as the costs of servicing become harder to justify. Wholesale platforms and high-net-worth individuals, the report said, will be the new target of asset managers.
The rise in self-directed investing within the mass affluent space, PwC continued, should be a tailwind for online direct retail platforms. That movement will, in turn, inspire a lower cost model across the asset-management space as commissions will be purged from the structure.
Aside from the drive toward lower fees, products with simple-to-explain features are expected to benefit from advisors spending less time explaining strategies. Under pressure to provide a compelling overall value proposition, advisors and managers are expected to work together toward delivering solutions that demonstrably target investors’ needs.
“Regulators may push on from RDR and regulate fees in their entirety,” the report said, highlighting a review of fee levels already being conducted by the Financial Conduct Authority in the UK. “While regulators are already starting to compare and cooperate, by 2020 there could be full-scale ‘contagion’ and a global regulatory consensus could well be underway.”
