Biggest lesson learned in last three years is ‘doing more with less’

Cerulli believes that the asset management industry will do ‘more with less’ as it targets future growth.

Despite the impact from turbulent markets, asset managers both in the U.S. and around the globe emerged from 2011 more focused than ever, says Cerulli in a Top Trends to Watch in 2012 report.

So whats the biggest take-away for asset managers in the wealth management space?

Cerulli believes the biggest lesson learned over the last three years is doing more with less, and firms should now apply that discipline to targeted growth, say the Boston-based research firms practice heads in their report.

This year, the asset management industry remains cautious yet poised for opportunity, according to Cerulli, which predicts that challenges for 2012 will include:

• Protecting margins at a time of greater pressure on fees
• Growing wariness among investors
• Increasing demand for costly support and services from distributors that want to work with fewer firms and institutional investors that want more services.

Many firms have adopted austerity positions during the last few years, and for good reason< Cerulli says. However, 2012 may be the time to put excess capital to work and incrementally grow resources and capabilities again.

Read on to learn eight top trends for asset managers highlighted in the Cerulli report.

1) Regional Growth Around the Globe

Cerulli believes the U.S. market of asset managers, which represents 50% of the world’s assets under management, will lead the way in net national income and market appreciation for the global asset management industry. Retail, retirement and institutional money sitting on the sidelines will begin to make its way back into the market. Advisors, fund providers, distributors and advisors will be more than ready to aggressively pursue prospects and clients.

Worldwide, growth will vary, led by Asia, Europe and Latin America as institutional investors and pension providers lead the way. Europe, still under the shadow of the sovereign debt crisis, will see moderate investment flow to the United States for safety, and to Asia and emerging markets for return.

Asia’s growth will be hampered by a decreasing wallet share among mutual funds, increasing regulation that will limit product development, and by distributors that are wary of expanding their roster of investments. Further, institutional investors will manage more of their assets internally, rather than doling out mandates. In Latin America, pension systems will continue to be the engine of growth.

2) Hiring on the Rise

Asset managers in the United States and elsewhere will engage in selective hiring in the next 12 months, Cerulli predicts, believing that firms will hire both specialists and generalists. The demand for more advisor-focused education including value-added programs is prompting managers to bolster their product specialist staffs and other training-focused human resources.

Rising request for proposal volume and database demands will translate into new hires for RFP teams, including writers and database administrators. The push toward social media and mobile-device friendly websites means that managers need social media and other e-commerce experts. At the same time, the dynamic nature of the industry calls for managers, particularly at smaller firms, to employ professionals that can operate as adaptable generalists.

3) Alphabet Soup on Regulation Menu

In 2012, regulation will be a primary driver of business decisions, Cerulli believes. An alphabet soup of regulations comes from Europe and Asia as regulators still smart from the collapse of Lehman Brothers. This means that firms will need to tread carefully as they build their international business, according to the firm.

Regulations will play an increasing role in how products are developed and sold. For this reason, fund managers will need to cater to local requirements, while keeping an eye on expenses and focusing on core strengths.

In Latin America, a key shift in Mexico’s pension regulation opened the door to international separate accounts, and the first RFP culminated with Banamex’s private pension plan awarding $500 million to J.P. Morgan, BlackRock and Schroders, Cerulli reports. In the United States, advice providers await final rules and implications of a possible universal fiduciary standard theoretically imposed by the Dodd-Frank Act of 2010.

4) The Retirement Sweet Spot

The global defined contribution (DC) revolution promised in the 1990s has never really materialized, but Cerulli believes that 2012 is the year global firms will put their stake in the ground and initiate their plans. While long-term investment has always been the sweet spot for mutual funds and DC platforms, personal pensions and budding government systems will be the best way forward for most firms, Cerulli says.

Opportunities will exist for both full-service pension managers, particularly those partnering with global custodian and administrators, and investment-only asset managers. In Europe, crumbling state commitments, high tax rates and new structures will drive assets toward corporate and personal plans. In Asia, mandated state systems designed to avoid the welfare state and tap in to high population rates will begin to take shape. Meanwhile, the pensions of Latin America will continue to provide strong and steady growth.

Cerulli believes that success in managing pension assets outside the United States will not come easy, nor will it come in the near term. Further, the investments most in demand will be lower revenue generating fixed income or passive equity mandates. The bulk of assets will be awarded to local managers, and for that reason, they will not be scalable from a global perspective.

By contrast, in the United States, where the DC market is well established, target-date funds are becoming the prominent investment vehicle.

5) Vehicle-Agnostic Product Development

In the U.S. asset managers will approach new product development from a vehicle-agnostic perspective, choosing open-end, closed-end, exchange-traded, collective trust and other fund structures to optimize asset class and distribution opportunities, Cerulli says.

Investment capital to seed these new products will be in short supply, but less meager than in the years following the market crisis. Assets will continue to flow to new and compelling investment strategies, particularly alternative and risk-sensitive strategies.

In Europe and Asia managers will review their offshore product lines to comply the local market needs leaning toward macroeconomic themes. More firms will assess local fund strategies for select markets. Similarly, in Latin America, Cerulli expects to see global managers take varied approaches to get a piece of the enormous Brazilian mutual fund market. Half a dozen global players are looking at launching local funds, while some continue to try to raise money via non-domestic products.

6) ETFs Grab More Attention

Exchange-traded fund (ETF) assets will keep mounting, says Cerulli, and in the United States in particular, ETF sponsors’ commitment to education will boost financial advisor adoption to new levels. Ongoing pressure to lower fees will drive institutional assets to ETFs, but institutions with sufficient scale may elect to construct their own index-based portfolios.

The magnitude of ETF growth, and their level of threat to active mutual funds will depend on several pivotal factors: capital market returns and the influence on investor preference for passive or active management, the motivation level of top-ETF sponsors’ to pay revenue sharing and the ability to tie sales to wholesaler commissions, significantly expanded support for ETFs in DC plans, and the ability of active ETFs to take hold in a meaningful way, Cerulli says.

Outside the United States, ETFs will continue to grow, but will remain more the focus for institutional investors and fund managers. ETFs dominate the private pension space in Mexico, Colombia and Peru, for example. Retail ETF adoption will be lackluster despite low fees, Cerulli predicts.

7) Advice an Anglo-Saxon Trend

As a global trend, advice remains confined to a handful of markets around the world, with the Anglo-Saxon world of the United States, Australia and the United Kingdom being islands of activity. In Asia, the rest of Europe and Latin America, advice remains a bank-driven transaction business, with the exception of the private banking channel. This trend will not change in 2012, Cerulli asserts.

In the United States, high-net-worth investors have become more involved in the oversight of their financial investments after being shaken up by the last three years. These investors no longer implicitly trust their advisors’ recommendations, Cerulli says. Accordingly, they are demanding more information, greater transparency, and greater involvement in investment decisions. Among high-net-worth investors, 86% verify their advisors’ recommendations through their own due diligence efforts.

In the United Kingdom, RDR regulation, when implemented, has the potential to change the local independent financial advisor market by making advice and transaction charges transparent and forcing many advisors to change their business models, assuming the regulations are not watered down.

Client-facing advisors, meanwhile, are looking for ways to reinforce their value to investors. Faced with ongoing volatility, U.S. advisors are increasingly adding alternative, non-correlated, and tactical asset allocation elements to client portfolios in an effort to steer clients away from risk. Additionally, large broker/dealers continue to express interest in broadening their advisors relationships with investors by increasing the role of financial planning.

8) Manager Fees: An Obsession

The global obsession with fees has polarized the industry, Cerulli says.

Active managers are trying to take back some control in an effort to defend their charges for portfolio management expertise, while passive managers argue for lower fees that will boost investment returns. Added into the mix are the debates around ETFs versus mutual funds, unconstrained versus style box, and direct versus advised channels.

These ongoing debates are healthy and good for the industry, and all views on products and services are, in some ways, correct. However, there is no single way forward, Cerulli believes, saying that in 2012 the focus on portfolio construction and outcome-driven investing will move to the forefront.