For the first time since April 2008, when markets were buffeted by the worst financial crisis in over 70 years, Moody's Investors Service has adopted a negative outlook for global asset managers.
Asset managers are under pressure from declining management fees, technological changes that make it easier to build portfolios but harder to generate excess returns from individual securities and government regulations, which involve hefty compliance costs and in the case of the Department of Labor fiduciary rule, more fee-based advisory services, according to Moody's analysts.
"Markets are at all-time highs but business conditions are at an all-time low," said Marc Pinto, managing director of the Financial Institutions Group at Moody's at a meeting with financial reporters. "The sky is not falling but fees are."
The Pressure From Declining Fees
The average fee for actively managed equity funds is 84 basis points – almost eight times the 11 basis point average for passive funds. Among bond funds, the equivalent comparison is 60 basis points compared with 10 basis points, according to Moody's.
In the current low-return environment, investors are more aware of management fees and these differentials, according to Neal Epstein, vice president and senior credit Officer at Moody's. But even before fees, he noted, there is evidence of underperformance of actively managed funds in some markets.
The result is money flowing out of actively managed funds and into passive funds — both index mutual funds and ETFs but primarily the latter — and increased ETF activity in "less penetrated" markets such as fixed income and "less penetrated" channels such as retirement.
"If asset management is boiled down to the products it sells — financial products — customers are not buying the traditional products but low-cost products," said Moody's Senior Analyst Stephen Tu.
The competition around fees is not just between active and passive asset managers but also among passive managers.