Asset management: Stressful times for investment houses

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Asset management is being squeezed by tougher stress testing and regulatory controls. Only the biggest players seem set to survive.

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It’s already all over for asset managers – so says a Morgan Stanley/Oliver Wyman report from mid-March. Since 2006, buy-side revenues have risen 45% but they are now headed south. Greater stress testing and regulatory controls on redemptions and investments as a result of reduced liquidity will mean higher costs of up to 5 basis points the analysts claim. Earnings could be down as much as 5% to 10% this year. 

That’s not great news for financial institutions that are left with fewer places to turn for earnings. As the financial crisis left investment banking looking less profitable, there was a shift towards building investment capability. Over the last eight years some of the largest global banks have put more emphasis on asset management – in tandem with their focus on private banking. 

Goldman Sachs, Morgan Stanley, JPMorgan, Deutsche Bank, UBS and Credit Suisse have all, at varying speeds and times, honed their focus to asset management for institutional, and also less cyclical private clients. For example, total AUM at Goldman Sachs was $779 at the end of 2010 – it is now $1.027 billion. In the final quarter of last year investment management at the US investment bank produced higher revenues than investment banking itself. 

Worst hit

The asset management industry had looked to be less at risk of regulatory burdens and liquidity impacts. In addition asset management was considered a panacea for private banks in their attempt to distance themselves from investment banking and become "holistic wealth managers" – for both large and medium-sized firms. 

In a global poll by Euromoney Research Group of thousands of private bankers the majority said asset management would be the top area for investment this year. However Morgan Stanley/Oliver Wyman’s analysts say middle-sized asset managers will be hit worst of all – unable to fund the legions of compliance officers that will be required and still maintain a profit. 

If correct, the forecasts could spell disaster for private banks that are not among the largest. Just as they plough money into investments, asset management will become less profitable. It seems impossible that any banks other than the largest can keep weathering the storms that have been created from the financial crisis, which is ironic given they were the ones that created them