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Without Asset Allocation, Asset Managers to Struggle

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Investment managers worldwide will grow assets less than 1% over the next five years, continuing a trend that began in 2008.

Before the financial crisis, annual growth of 6% to 7% was the norm. With such a slowdown in net new flows, many asset managers may struggle with shrinking revenues, according to a whitepaper from Darien, Conn., based Casey Quirk, a management consultant to the asset management industry.

“Competition will become fiercer,” the report concludes. Benjamin Phillips, a co-primary author of the report and a partner at Casey Quirk, said that these trends apply to independent RIAs and financial planners as well as to larger asset management firms. Casey Quirk’s report sees a challenging landscape for money managers but also predicts success for firms that can innovate.

Firms that succeed over the next five years, according to Casey Quirk, will prove to be skilled at one or more of the following:

  • Uncorrelated and superior active equity, fixed income and/or alternatives
  • Cost-efficient indexing and exchange-traded funds (ETFs)
  • Asset allocation expertise, such as multi-asset class solutions, liability-driven investing (LDI), target-date retirement funds, and outsourced investment services
  • Selling open-architecture best-in-class solutions

Companies that can develop and enhance those capabilities will win 90% of the net new revenue available over the next five years, Casey Quirk predicts.
Of those capabilities, which is most likely to help RIAs succeed? “Asset allocation,” Phillips said. “It’s the most open playing field, and it’s probably the skill set demanded the most by clients. At the same time, asset allocation may be the area product manufacturers have spent the least time developing.”

Expertise in asset allocation can take several forms, according to Phillips. Some advisors will develop their own methods in-house while others will turn to outside providers. For the latter group, the challenge will be selecting the best models and applying them to specific clients.

Either way, asset allocation will undergo a major change in the coming years. “A great deal of work already has been done on long-term accumulation planning,” Phillips said. “Now interest is shifting to finding the best ways to get an income stream from a portfolio. That might be for clients who are spending down their portfolios in retirement or for others who just want more investment income.” The most comprehensive form of asset allocation will include distribution planning, and advisors who master this art are likely to see their revenues keep growing.

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