GLOBAL - Active management firms' revenue worldwide declined by 30% - 50% last year, Watson Wyatt research reveals.
Watson Wyatt European head of investment consulting Paul Trickett said: "If returns stabilise now, then for pension funds and other institutional investors the worst of the pain is over but for asset managers the pain is just starting. Earnings for 2008 were down between 10% and 15% from 2007 - that is beginning to look attractive for 2009."
In addition, given the ad valorem fee the industry uses, the research showed profit would remain under pressure as long as market returns and new inflows remained low and while there was little appetite for raised fees.
It also said asset managers would continue to reduce headcount mainly in non-core roles by around 10% and costs mainly in variable pay by around 20% in order to return to profitability.
Trickett said: "This is clearly an unstable business environment for active managers and 'people' issues are likely to be superseded by 'business' issues as the principal concern of management and chief among these will be consolidation, regulation and sustainability."
The study claimed pressure on profits could be countered by adding new assets to the existing cost base. This would result in increased consolidation in the short term that would continue if markets were to fall further.
However, it added while the merging of entities can make business sense, paying too high a price in a falling market could also damage rather than enhance their sustainability.
Trickett said: "We are expecting the nameplates of existing asset managers to change substantially during the next few years. While in the past there has generally been a bias against change in ownership, we need to consider that some of these changes could be materially positive for the survival of a firm."
According to the research, trustees could prepare themselves to changes in the asset management industry by revisiting whether the current extent of active management remains appropriate for the fund.
Other actions are to continue to diversify the manager line-up; renegotiate fees and terms, focus on sustainability issues and think through scenarios where certain eventualities could compromise the future performance of their managers, Watson Wyatt concluded.
The Department for Work and Pensions (DWP) has launched a website dedicated to signposting people to where they can receive guidance typically associated with a so-called 'mid-life MOT'.
This week's edition of Professional Pensions is out now.
Ben Gunnee reflects on 2018 and talks about the Fiduciary Management trends to keep an eye on in 2019
Lloyds Banking Group secured 630,000 new pension customers last year, according to its 2018 annual results.