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Asset Managers Face Tight Profit Margins Due to Rising Infrastructure Costs

In a recent report by PwC, it has been revealed that the landscape for asset managers is undergoing a significant shift. Traditionally relegated to the back office, infrastructure needs are now taking center stage in the strategic decision-making of asset management firms. The data illustrates a troubling trend: since 2018, profit margins measured as profit per Assets under Management (AuM) have dropped by 19%. Moreover, projections suggest a further decline of over 9.1% by 2030. This stark reality indicates that asset managers must now grapple with the implications of rising infrastructure costs while trying to compete effectively in a tightening market landscape.

The report highlights a crucial point of concern: 67% of surveyed asset managers have reported that fee compression is restricting their investment capacities. This signals a fundamental recalibration of how firms prioritize their resources and structure their strategies going forward.

Roland Kastoun, PwC's Global Asset and Wealth Management Advisory Leader, comments on the industry's changing dynamics, saying, "The industry's profits per dollar managed have fallen by almost a fifth, and the bill for the pipes keeps rising. The managers who survive the next five years won’t be the ones with the flashiest AI, but rather the ones who fixed the so-called boring stuff first."

As firms contend with rising expenditures, a mere 23% of asset managers direct a majority of their technology budgets towards developing new capabilities, while a staggering 29% allocate more than 70% to maintaining outdated legacy systems. This imbalance raises questions about the long-term viability of existing strategies if firms cannot prioritize innovation alongside necessary maintenance.

Interestingly, the report indicates that artificial intelligence (AI) has emerged as a double-edged sword in this context. While it promises enhanced capabilities, nearly 24% of asset managers acknowledge that data fragmentation and 17% cite legacy systems as considerable obstacles to leveraging AI effectively.

Another significant finding reveals that almost 58% of asset managers consider market data to be a poor value investment, labeling it as one of the most expensive infrastructure layers relative to the value it delivers. This perception is prevalent even when compared to other costly components such as regulatory reporting systems and core technology platforms, which received 47% and 46% ratings, respectively.

On the supply side, 70% of infrastructure providers expressed a belief that they will command a larger share of industry revenues. They also recognize hyperscale cloud providers as significant emerging threats to traditional business models. Björn Ebert, Financial Services Leader at PwC Luxembourg, emphasizes this shift, stating, "Seven in ten infrastructure providers expect to take a bigger slice of the pie, which tells you where the power in this industry is quietly shifting."

Asset managers now face distinct choices regarding their operational infrastructures. Only 21% prefer to purchase solutions outright, and 18% favor partnerships, with a mere 13% inclined to build in-house capabilities. The report identifies four archetypes of emerging infrastructure: infrastructure orchestrators, digital and tokenization platforms, specialist modular providers, and integrated asset managers. Each firm must assess its assets and decide which components to own, standardize, or outsource to specialists to maintain competitive margins through 2030.

In summary, the landscape for asset management firms is increasingly complex due to rising infrastructure demands and constricting margins. Adaptation and strategic foresight will be critical as firms navigate these challenges, and those who act decisively may well position themselves advantageously in a reshaped market. As asset managers reassess their infrastructure needs, the focus on long-term viability and sustainability in profit margins will remain paramount.

Media Contact: Penta Group, [email protected]