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As historically successful asset managers look at their world that is showing signs of cracking, they express concern that the traditional business model upon which they have relied is now threatened. In a survey of the top asset managers in the world, Boston Consulting provides a glimpse into the shifting sands that will likely result in “tomorrow’s industry leaders (appearing) quite different from today’s.” Traditional firms that rely on a static business model that has worked in the past are not guaranteed to be around in the future, as a new categorization for the asset management industry might best drive business planning.

A new world for asset management is likely to leave those that don’t adapt in the dust

The asset management industry could be at the dawn of an “industrial revolution” that is likely to turn the industry on its head in unexpected ways. But success for those who understand the roadmap and recognize how the industry is being transformed can position their firms to reap the future benefits.

In part, the new thinking can be best illustrated by considering what has been considered a solid correlation pattern that is suddenly broken. In today’s fund management world, asset growth is not leading to higher profit margins.

This correlation decoupling is yet another sign of disruption amid a generally poor  year for traditional fund managers, the Boston Consulting 2017 asset management report titled “The Innovator’s Advantage” noted.

In 2016, global asset management industry assets climbed to $69.1 trillion, up 7% on the calendar year. That headline might appear positive except that 2016 was a year in which the S&P 500 Total Return Index was up 12.25%. Asset growth failed to keep pace with a common stock benchmark that has likewise bedeviled many active fund managers.

Not only did the industry fail to match the S&P 500 yet again, but the 7% growth was not driven by new inflows, a meaningful benchmark, but rather was based on what investment performance was delivered to investors.

Net new asset flows, characterized as “the industry’s lifeblood” by Boston Consulting, was “tepid” at only 1.5% of current assets.  Compare this with the 4% to 6% annual asset growth prior to the 2008 financial crisis historical benchmark, and witness an industry struggling to find its way since that point.

New investment methods and business models will emerge, recognizing roadmap is critical to developing strategic plan

While the statistical analysis and economics in the traditional asset management industry has been somewhat bleak, there are new opportunities on the horizon for fund managers willing to explore strategy innovation, look at their business models from entirely new perspectives and embrace not reject technology, data driven solutions and a mathematical logic that integrates with human decision making.

To understand the opportunity, Boston Consulting dives deep into business models that are currently working in asset management and overlays insight regarding tomorrow’s likely performance drivers, revenue pitfalls, and different product categorizations.

The report points to five growth performance drivers, each of which have different characteristics.

One such growth standout is a geographic region, China, while other success performance drivers include different investment methods alongside technology enhancement and cost reduction strategies.

China posting big numbers against global trend… again

In the economic world, China has been an oddity on several levels, delivering historically out of sample performance. This is evidenced in its asset management industry’s fat tail, unusually large industry revenue growth.

China has become somewhat accustomed to delivering standard deviation busting GDP growth and its asset management industry is now execution. Up 21% in 2016 total growth, what stands out is that 17% of such growth was driven by net new inflows, a traditional sign of health in the asset management industry.

What the report didn’t discuss was the institutional challenges that US firms have been having in entering the market, the whisper issue that has bedeviled exchange operators and traditional asset managers. Those with people working inside China, such as Man Group, have found operating in an environment where the rules of conduct are not often spelled out a challenge.

The report was more than just facts and figures, but rather pointed to the need to recognize how product category definitions that also correlate to pricing power, or lack thereof. It looked at alternatives and put together a list of characteristics for the successful asset manager in the future while forecasting increased mergers and acquisition activity as the middle of an industry is likely to be squeezed even more in the near future.

In particular, the report outlined five categories of firms in the future that are very different from today’s general categorization. Many asset managers will update their business models to fit the future while others will cling to what has worked in the past.

The reported pointed to strategies currently in operation that are winning and have a defined plan with benchmarks. What clear is in the next decade will be very different from the recent past, with many legendary traditional asset managers finding they are no longer relevant.