In a statement on the Morgan Stanley website, European diversified financials equity analyst Anil Sharma noted the “mounting pressure on firms to cut their management fees”.
“For many firms, the lion’s share of AUM growth came from market gains rather than new flows,” Mr Sharma wrote.
“When the winds turn the other direction, the reality of these fee pressures could come to light.”
The industry had missed the opportunity to leverage the bull market for greater efficiencies and cost base restructuring, he said.
“Several forces are at play, but the root problem is pressure on high management fees and perception of value for money – evidenced by the flow of assets out of actively-managed funds and into passive portfolios,” Mr Sharma wrote.
“Asset managers do need to get serious about reducing their cost structures and pass on some of that savings to investors in form of lower fees.”
The good news was that there was “ample room” for cost savings, he said, pointing to Morgan Stanley research that indicated automation and outsourcing could reduce “as much as 30 per cent of the current cost structure”.
“This, however, will require a fundamental rethinking of the operating model,” Mr Sharma said.
Around 55 per cent of asset management costs went to remunerating staff – staff that were performing functions that could otherwise be automated “or improved by applying data science”.
“Our recent work found that the industry could cut costs 20 per cent by automating some employee functions,” Mr Sharma said.
Furthermore, asset managers could stand to outsource more of their functions, reducing cost structures by an extra 10 per cent.
“Although firms have moved to outsource back-office offices, they have kept most distribution and investment-related functions in house,” he said.
Mr Sharma also pointed to the benefits of consolidation, stating that individual funds as well as firms should be looking to scale.
“A significant portion of the funds in our coverage group are small, older than five years, and suffering from steady outflows,” he said.
“Firms should look to close or merge funds small funds that have failed to thrive, freeing up resources for products that have achieved traction.
“Now, more than ever, the industry must tackle the cost challenge.”