Echoing recent reports on wealth management, a new study on the world's asset management business showed these firms experienced tighter margins last year, while total assets rose by 12 per cent to $52.6 trillion, mostly due to rising markets.

The rise in assets last year followed the 17 per cent drop in 2008, according to The Boston Consulting Group.

However, while margins have been squeezed, BCG predicted that margins may widen this year to as much as 35 per cent of net revenues, compared with about 31 per cent in 2009, 34 per cent in 2008 and a historic peak of 40 per cent in 2006.

The investment management industry saw clients move into low-margin, cash-type products at the height of the financial turmoil, although there has been a shift towards equities and fixed income in 2009 but away from structured products and alternative investment classes, the report said.

Reports in recent days by Scorpio Partnership and McKinsey have both pointed out that margins have been compressed, as firms have seen revenues hit by client’s desire for cheaper products. In some cases, firms’ profits have been hit by taxes, regulatory costs and litigation.

Analysts at McKinsey (to view article, click here) have argued that these tighter margins will force investment firms and wealth managers to restructure, sometimes via mergers. For example, the financial turmoil coincided with the purchase by BlackRock of Barclays Global Investors, creating the world’s biggest asset manager.

And at Scorpio, managing partner Sebastian Dovey told this publication: "Many will remark that the pressure to become more efficient is now intensified. However, our view is that this pressure was always there. Now with almost ten years of benchmark assessment we have the detailed data to determine the degree of inefficiency in the industry." His firm created the original benchmark assessment for the wealth industry.
 
"The current market winners are not the obvious shops. The benchmark data illustrates where different models are working well," he added.
 

Among other details in the BCG report, it said that AuM rose last year but net revenues fell by 11 per cent and operating margins fell by 19 per cent. Firms cut their overall costs by an average of 7 per cent last year.

The report also noted wide differences in company performance, with the top 20 per cent of firms grabbing 88 per cent of net sales; 37 per cent of asset managers saw clients pull money out. Some 33 per cent of institutions saw their revenues fall by up to 10 per cent in 2009 from 2008, while 23 per cent said revenues fell between 10 and 20 per cent. Only 3 per cent of firms said revenues rose by up more than 20 per cent last year.

“The sophistication of investors and, in turn, the demands that they place on their asset managers continue to grow. The performance of asset managers and financial advisors has come under increasing scrutiny. Products and pricing are in flux,” the report said.

Among other detailed findings of the report, it snowed that on average, AuM rose by 11 per cent in North America, 12 per cent in Europe, 7 per cent in Japan and Australia, and 25 per cent in the rest of Asia. For India, AuM soared by 51 per cent, and China AuM rose by 29 per cent. In Latin America, there was a 22 per cent growth rate.

Competitive pressures are squeezing fees. A survey by BCG of respondents overseeing a total of $2.8 trillion of assets showed that they are seeing lower fees. Some 40 per cent of respondents, for example, said fees have fallen.