Success influenced by business model differences
Business success has resulted from marketing and product innovation as much as from investment prowess and performance. This dynamic will likely continue. The future may particularly favor bigger organizations that can exploit scale advantages through brand differentiation and robust, yet nimble, technological infrastructure.
- Weak growth in revenues and profits masks differences by geography and segment. In particular, there is profitable growth in Asia, wealth management, investment solutions, and alternative assets. These segments reflect the Parallel Worlds scenario, in which new sources of investment funds flow to those firms most attuned to investor needs and wants.
- The ecosystem framework pinpoints three sources of business model challenge and opportunity at asset management firms. First, although existing organizations have strong brand credentials to develop innovations, they have inbuilt limitations from innate inertia (see Christensen 1997). Second, there is a threat of substitutes—for example, asset owners internalizing some or all of their asset management activities (see Porter 1979). Third, while existing organizations have previously had pricing power, bargaining power is now on the side of clients (see Porter 1979).
- Scale advantages, evident in many industries, are seen in asset management, too. It is likely that increasing concentration in the top five asset managers continues (currently BlackRock, The Vanguard Group, State Street Global Advisors, Fidelity Investments, and Allianz). The top five firms have grown their share of assets under management (AUM) from 14% in 2000 to around 19% currently (Willis Towers Watson 2000, 2017b).
- Mergers and acquisitions (M&A) are the rational response to help develop strategic edge and/or AUM scale. Areas where strategic edge is critical include the following:
- differentiation in products and services;
- managing scale successfully, particularly where product capacity is an issue;
- adaptability to new needs and trends;
- people and culture edge, where employee engagement and employee value proposition are central to better client outcomes; and
technology quality, where the IT need is for a more holistic technology and data strategy.
- The industry has large numbers of firms doing very similar things, and businesses that lack edge and suffer from deteriorating fundamentals are candidates for consolidation.
- Our survey respondents see consolidation as likely to accelerate in the next 5–10 years, with 72% expecting consolidation to speed up significantly or somewhat. Yet consolidation is proceeding at a slow pace (there have been 20 deals involving firms over $50 billion AUM in six years; Boston Consulting Group 2017). The signs are that there will be more deals in the next 5–10 years. The likelihood of increased specialization by segment is a driving force, particularly in the product manufacturing, distribution, and wealth segments. This anticipated trend also reflects the reduction in dependencies between banks and insurers and their asset management subsidiaries. But asset management mergers are not straightforward—there is generally overlap, disruption in integration, brand and integrity confusion, and limited cost synergies.