Sinking Fees Are Creating ‘Leaky Boats’ for Asset Managers

It’s not just McDonald’s that’s offering value deals. 

Investors are looking for budget-forward products, too, shifting their focus from higher-cost actively managed vehicles to lower-fee passive funds. Approximately $180 billion was pulled from active equities in the first half of 2024, while passive equities saw inflows of $279 billion over the same period, according to a McKinsey & Company report. 

It’s upending traditional revenue streams for asset managers.

Back from the Brink

2022 was rough for the markets, but the financial industry is in recovery. Global asset managers hit a record AUM of $132 trillion as of June 2024 — that’s up 8% from last year and a 21% rise from 2022. Despite the impressive growth, revenues remain stagnant, creating “leaky boats” in a rising tide for managers, according to McKinsey. The report found:

• From the beginning of 2023, significant outflows from open-ended active equity funds led to a revenue loss of $2.5 billion for the industry.
• Fees for new products are also plummeting, averaging 20% lower than existing ones.
• Managers are seeing growing demand for cheap ETFs, as issuers have already begun converting existing mutual funds into passive products.

Sinking Feeling. Interestingly, on the fixed-income front, both active and passive products performed well, attracting $333 billion and $142 billion, respectively, with expectations that these trends will continue through the end of the year.

“Today’s asset management industry operates as a two-speed market,” the McKinsey report said. “It’s in equal parts a place of intense competition with challenged product segments and a market that’s ripe with promise.”