10 October 2013

European regulation could trigger fund manager consolidation - study

According to a study entitled 'The impending profitability challenge for European fund managers', conducted by BNY Mellon and Ernst & Young (EY), complying with multiple regulatory measures will represent the biggest cost for European fund managers.

Exacerbating the revenue threat is the rising costs associated with the "tsunami" of new regulations to come and the need to provide more transparency and disclosure. Regulations are the single biggest cost facing the industry with an estimated $0.3 billion – $0.5 billion over the next three to five years for European firms. This will significantly raise barriers to entry into the market and may force consolidation at the smaller end. Conversely, new regulations will generally favour larger fund managers who can lobby, resort to multi-asset styles and have the risk infrastructures in place to cope.

In general, costs have been managed well since the credit crunch, rendering further reduction initiatives harder to identify and implement. Consequently, firms will have to be creative to manage revenue up, and costs continuously down; constantly challenging their business models and looking for short term opportunities to aggressively restructure their funds ranges. Those firms (more prolific within larger companies) who can create a framework where innovative ideas are encouraged will be better placed to take the advantage, providing their infrastructure does not get in the way of their ability to implement.

There are a multitude of initiatives that fund managers could consider in the face of falling profitability and rising cost / income ratios to prevent the increasing likelihood of becoming an acquisition target. These include reconsidering the opportunities afforded by long term restructuring and building partnerships with third party service providers to outsource various middle and front office functions. CEOs and CIOs need to interface more strategically with service providers to examine "The Profitability of the Possible".

Where successfully implemented firms will narrow, and possibly reverse, the threat to profit margins over the long term. However, fund managers will need to go through operational and cultural change in the short and medium term to achieve this.

The stakes are very high; winners will lead fund management into a profitable new era, whilst the losers, those that fail to act now to protect their profitability, will face failure or, at best, be acquired.

Full study

Further reporting © IPE