The European funds industry faces extra expenses totalling between $300 million and $500 million (approx EUR220 million to EUR365 million) per annum over the next three years to address new regulatory requirements, according to a study by BNY Mellon, the global leader in investment management and investment services, in association with EY.
This translates over the next three to five years into a 'conservative' 3%+ increase in cost/income ratios correlated to a 2%+ uplift in total expense ratios (assuming profit pools remain at current levels).
The study – entitled The Impending Profitability Challenge for European Fund Managers – highlights the increased pressures on firms as compliance costs rise and investors demand cheaper products.
These pressures may lead to increased consolidation of asset management firms and create significant barriers to entry, as small firms struggle to survive. Larger fund managers will benefit from offering multi-asset products, as well as their robust risk infrastructures.
As the top 20 fund management houses gain market share there is a noticeable change in asset balance, with passive funds and ETFs growing at twice the rate of active funds, according to the study.
Other key findings of the study include:
Daron Pearce, EMEA Head of Global Financial Institutions at BNY Mellon, said: "In recent years we have seen major changes in both institutional and retail investor behaviour, new approaches to fund distribution and accelerated product innovation, all of which impact fund manager cost/income ratios. There are a multitude of initiatives that fund managers could consider in the face of falling profitability and rising costs/income ratios. These include reconsidering the opportunities of long term restructuring and building partnerships with third party providers for middle and front office functions. This is not just an issue for CIOs, but also something that needs to be focused on at the CEO level."
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