Financial Services

Global Asset Management

Industry Outlook
Integrating Strategy with
Experience in a Changing World

There are several distinct
opportunities for growth –
particularly through globaliza-
tion and expansion into new
markets, a differentiated product
set and new strategies for the
retirement market.
Dear Colleague:
For the past eight years, the Financial Services practice of the member
firms of Deloitte Touche Tohmatsu (DTT member firms) has produced
the annual Asset Management Industry Outlook to address the “top 10”
issues affecting firms in the year ahead. This year, we took a new
approach, working with the Economist Intelligence Unit to develop
both a long-term industry view, entitled Global Financial Services
Industry Outlook: Shaping Your Strategy in a Changing World, as well as
companion reports that consider the same issues at a more focused level
by sector.
Our Global Asset Management Industry Outlook: Integrating Strategy with
Experience in a Changing World report finds that while issues like risk
management and regulatory compliance remain a challenge, there are
several distinct opportunities for growth – particularly through global-
ization and expansion into new markets, a differentiated product set
and new strategies for the retirement market.
To identify critical market drivers for our Global Industry Outlook
reports, we conducted an online survey of 175 board members and
global executives across the financial services industry, of which 40 were
from the asset management industry. Based on our findings and our
client experiences, we believe that the issues identified within this
report will have the greatest impact on asset managers as they approach
2010. Asset managers should embrace the imperatives outlined in this
report to achieve long-term success.
We plan on continuing our research into the future of the asset manage-
ment industry and examining other ways in which asset management
firms can sustain growth and integrate strategy with experience in a
changing and dynamic world. In the meantime, we hope you find this
report valuable.
Garry Moody
Global Asset Management Leader
Deloitte Touche Tohmatsu
Asset management firms are adapting to a future that requires the ability to “think different.”
The challenges are clear. Major asset management firms have begun to reinvent themselves to
succeed in an increasingly global, technology-enabled and heavily regulated sector of the financial
services industry.
Despite the challenges facing the industry, growth prospects
are high. Asset managers should consider catering to the aging
baby-boomers, emphasizing product innovation and seeking
expansion in new markets around the world. In this paper, we
focus on the most important issues over the next three to five
years as revealed through an industry survey, interviews with
senior industry executives and practice leaders from the DTT
member firms. The five top issues on the asset management
watch list are:
• Globalize and consolidate. Asset management firms will
grow by consolidating and by exploiting fast-growing overseas
markets such as China and India.
• Promote compliance. The regulatory burden on asset man-
agement firms is increasing – as are the reputational conse-
quences of infractions.
• Differentiate products. The appetite among institutional
and individual investors for diversification and uncorrelated
returns will continue to propel growth in alternative invest-
ments. Fast-growing product segments range from exchange-
traded funds (ETFs) to portable alpha.
• Better manage risk. Like executives in other sectors of the
financial services industry, asset management executives cite
better management of operational and reputational risk as a
key to profitability.
• Adapt to demographic shifts. As baby-boomers become
retirees, demand will grow for products that turn savings into
retirement income.
A mixed outlook
Survey respondents offer a mixed picture of the economics of
the asset management sector. More than 80% of asset man-
agement industry respondents believe that revenues at their
own organizations will grow over the coming three years. When
it comes to profitability, 43% of respondents believe that prof-
itability will increase, 30% think that it will stay the same and
27% predict that margins will decline. One reason for this
mixed outlook is that the traditional asset management business
has entered an era of greater transparency and intense price
competition. Another may be that the most promising avenues
for growth also require significant investments. For instance:
• Fast-growing markets with relatively young populations and
high savings rates offer the promise of growth. But building a
presence in these markets – China, India and others – entails
both expenditures and risk.
A Bumpy Ride in China, James Walker, Wall Street Journal, March 1, 2006
1
Huge Losses for Chinese Joint Ventures, Financial Times, January 23, 2006
2
• Product differentiation can increase margins, but also involves
investments in non-traditional fund management capabilities.
The more eclectic the funds, the more costly it is to build or
buy them.
• A more consistent and disciplined approach to compliance
can reduce (or at least slow the growth of) compliance expen-
ditures over the long term, but can involve large upfront
investments.
The five issues to watch
1. Globalize and consolidate
Over the next three to five years, asset managers will grow by
consolidating as well as by exploiting overseas markets – China
and India in particular. Throughout the Asia-Pacific region, gov-
ernments are encouraging savers to become investors, turning
the region’s high savings rate into a source of risk capital to
drive economic growth.
Nearly 63% of asset management survey respondents rank
globalization as the top driver of profitability over the next three
to five years. Within the broad category of globalization, 45%
say global consolidation will have the greatest impact on profits,
while four out of 10 cite distribution opportunities in new
markets.
The biggest bets are on China. As of December 2005, 20 for-
eign fund managers had moved in.1 China’s fast-growing mid-
dle class needs investment products and financial advice for
retirement. Despite the geopolitical and market risk, two-thirds
of survey respondents (68%) say that China will be important
or very important to their organization in 2010. Nearly half say
the same about India, while Russia and Brazil rank a distant
third and fourth.
Profitability in China, however, can be elusive and requires a
long-term view. Some institutions that have made substantial
commitments stumbled out of the gate, including the UK’s
Schroder and the Netherlands’ ING, which reported large losses
in their China joint-venture funds in the fourth quarter of
2005.2 Other asset managers, such as Fidelity and BlackRock,
are taking a cautious approach, avoiding major investment until
the path to profitability becomes more clear. “We currently do
not believe that the conditions under which we would be able
to enter the markets would be of benefit to us,” contends
Jonathan O’Brien, chief financial officer and executive director
of oversight for Fidelity Investments, Asia-Pacific Region. “If we
were to go into China right now, we would be a minority
partner in a joint venture, and that’s not something we will
usually consider. I’m not convinced that the first-mover advan-
tage in China is actually going to be an advantage.”
Some asset management firms are turning to joint ventures
with large Chinese banks to gain access to an established cus-
tomer base. With over 70% of retail deposits, the four big state
banks have a captive client base of hundreds of millions of cus-
tomers and formidable distribution power.3 The foreign firm –
which the government limits to a 49% stake – supplies the risk
management, compliance and fund management expertise; the
Chinese partner supplies local market knowledge and a distribu-
tion network.
For instance, in 2005 Credit Suisse’s asset management business
formed a joint venture with the Industrial and Commercial Bank
of China (ICBC) to offer ICBC’s customers the first bank-spon-
sored mutual fund in China, investing in stock and money mar-
kets. In its launch, the fund raised over $500 million. ICBC
owns 55% of the joint venture, Credit Suisse 25% and China
Ocean Shipping Company 20%.
India has also attracted considerable foreign attention, thanks
to its rapid economic growth, strong equity market, declining
interest rates, high savings rates and easing of protectionist reg-
ulations. Mutual fund assets under management almost dou-
bled between 2003 and 2006 to $48 billion, while the Bombay
Stock Exchange’s Sensex index tripled during the same period.
About half of the money is managed by non-Indian firms.
Fidelity started its first domestic mutual fund in 2005, and
JPMorgan Chase has announced plans for funds in the second
half of 2006.4
Asset growth remains strong in Western Europe. However, as a
result of further European integration, Central and Eastern
European markets (for instance, Poland) will become attractive
from a distribution perspective.
Twenty-five percent of asset management survey respondents
see industry consolidation in their home country as a major
business driver over the coming three to five years. And,
indeed, domestic consolidation looks set to increase as mid-tier
asset management firms, pressured by a higher cost of doing
business, find it increasingly difficult to compete.
According to the trade group Investment Company Institute, a
handful of large firms manage the lion’s share of money, with
the rest divided among dozens of firms with between $5 billion
and $20 billion in assets. Many are owned by banks, securities
firms and other companies with core businesses outside asset
management. These owners (particularly banks) have increas-
ingly chosen to shed their fund management businesses as
these businesses are experiencing difficulty in achieving indus-
try-beating performance, have a smaller asset base to spread
their fixed costs over and encounter the same conflicts between
fund ownership and fund distribution as their larger counter
parts. These funds are most likely to be swallowed by larger
players, leading to lower overhead costs and greater operating
efficiency. Examples of this trend include Northwestern Mutual’s
sale of its Mason Street Funds to American Century Investments
and Federated Investors, First Tennessee Bank’s merging of its
funds into a group run by Goldman Sachs and AmSouth
Bancorp’s sale of its fund group to Pioneer Investments.5
2. Promote compliance
When asked to cite the top influences on profitability for their
firms, asset management industry survey respondents rank com-
pliance as a close second to globalization. Sixty percent of
respondents say regulation is a top issue, and 83% of these
respondents cite the increasing cost of compliance as a signifi-
cant impediment to profitability in the next three to five years.
For example, as part of a number of rules promulgated in
response to the market timing and late trading scandals, the US
Securities and Exchange Commission (SEC) adopted the Mutual
Fund Redemption Fees rule (22c-2) which requires intermedi-
aries to provide fund firms with information regarding individual
shareholder trading activities so that the fund firms can detect
any market timing activities. Fund firms are directed to enter
into written agreements with intermediaries that acknowledge
the intermediary’s obligation to provide sub-accounting data
and enforce frequent trading rules upon the funds’ request. A
recent TowerGroup study estimates that the industry-wide cost
to comply with this rule could exceed $1 billion.
Asset management executives interviewed for this paper cite
compliance as critical to their firms’ reputations and thus ulti-
mately to their ability to grow and prosper. Compliance can be
especially difficult in Asia, where rules differ and sometimes
conflict from one country to the next.
In Japan, for instance, regulators demand that each subsidiary
and affiliate of a foreign firm must have its own local compli-
ance department or compliance officer, with local control.6 This
approach may make it difficult to develop global compliance
processes and achieve economies of scale.
Although Japan is trying to harmonize its investment manage-
ment rules, progress remains slow and the foreign investment
management industry is exploring the possibility of having input
into the process. And two of the markets with the most prom-
ise, China and India, are still developing and/or modifying their
regulations.
In the hedge fund sector, regulation is becoming a reality
throughout the world. Historically unregulated or lightly regulat-
ed, hedge fund advisors or the funds themselves are now sub-
ject to regulation in the US, Canada, Japan, Australia and most
European countries. In practice, this usually means that hedge
funds are regulated or authorized like any investment adviser; in
some jurisdictions, such as Luxembourg and Hong Kong, there
are specific proficiency requirements or recommendations.7

3
Quality Will Attract Big Funds’ Attention, Henry Smith, FT Mandate, December 2005
4
Mutual-Fund Hot Spot: India, Shefali Anand, Wall Street Journal, March 10, 2006
5
Merrill Deal Hastens Retreat From Funds, Tom Lauricella and Ian McDonald, Wall Street Journal, February 14, 2006
6
Compliance Function at Market Intermediaries Final Report, Technical Committee of the International Organization of Securities Commissions, March 2006
7
The Regulatory Environment for Hedge Funds: A Survey and Comparison, Technical Committee of the International Organization of Securities Commissions, March 2006
3. Differentiate products
Asset management industry survey respondents cite product
innovation as a major contributor to revenue growth. The tools
of financial engineering allow institutions to design products for
any audience; from lifecycle funds for future retirees to ETFs for
active traders and alpha transport strategies for institutional
investors. Innovation is often associated solely with hedge funds
and other alternative products. However there are a myriad of
instances of innovation across markets, geographies and product
lines.
The flip side of this is that investment managers who continue
to rely on traditional long equity and fixed-income products
face increasing competition. Larger fund families may be able to
increase fees, or at least maintain them while reducing expenses
through economies of scale. For instance, TIAA-CREF sharehold-
ers approved a fee hike in early 2006 after management
attempted – and failed – to get approval the previous year.8 In
general, however, there is limited ability to increase fee income.
The dollar-weighted average expense ratio at a US retail fund
was 0.89% in 2004, according to Morningstar.9 Compare that
to a typical compensation structure at an alternative investment
fund: a 1-2% management fee and 20% share of profits. This
contrast may at least partly explain why survey participants
point to new product development as essential to future success.
One of the fastest-growing new asset classes is ETFs. Already a
liquid, low-cost alternative to index mutual funds, ETFs will con-
tinue to multiply and offer exposure to new types of assets.
Global ETF assets grew more than 30% in 2005 and stood at
$313 billion in January of 2006, according to the Investment
Company Institute. In 2005, 51 new ETFs were introduced, and
in 2006 and beyond ETF growth is expected to focus on special-
ty products that track commodities, bonds and currencies.10
According to Morningstar, the average ETF has an expense ratio
of 0.42%, compared to 0.73% for the average index fund.
Other innovative products that have gained momentum in the
past year include:
• Both private and public real estate investment vehicles with
assets in Japan, China, Singapore, Korea, Thailand and other
fast-growing Asia-Pacific markets. According to a 2005 poll of
fund managers by Singapore-based OCBC, Asia continues to
be a favored region for institutional real estate investment.
• In Canada, principal-protected notes sold to high-net-worth
investors seeking both capital protection and exposure to risky
markets or sectors.
• In the US and UK, lifecycle funds, which offer retail investors
an easy way to reallocate their assets as they grow older. The
funds are designed for growth early in the investor’s life and
principal preservation as the investor nears retirement. US
assets in lifecycle funds rose 50% between 2003 and 2005.11
8
Fund Times: TIAA-CREF Gets What It Wants, Morningstar Advisor, January 27 2006
9
Fund Fees: The Silver Lining Has a Big Dark Cloud, Russel Kinnel, Morningstar, April 7 2005
10
ETFs Shift Focus, Tracking Items Like Oil, the Euro, Jen Ryan, The Wall Street Journal, January 19, 2006
11
Lifecycle funds let you do the retirement ‘one-step’, Christian Science Monitor, June 13, 2005
12
European Fund Market Data Digest, FERI Fund Market Information Ltd., 2006
13
Europe Had Record Growth in Hedge Funds in 2005, Margot Patrick, Dow-Jones, February 23, 2006
About the online survey
In November 2005, we used an online survey to poll 40
senior asset management executives across the financial
services industry to identify the key transformative issues in
the industry over the next three to five years. Respondents
were comprised of board members, senior executives
(“C-suite”), business unit heads and other senior profes-
sionals at asset management firms. The executives sur-
veyed were based in Asia-Pacific (30%), Europe (40%) and
North America (30%). Institutions with assets of $1 billion
to $10 billion made up the largest single category (38%),
followed by those with more than $250 billion (25%).
In the European fund market, estimated net sales reached
373.7 billion euro in 2005 (outpacing the US), and the mix
among products is changing slowly.12 Although mainstream
products accounted for most of the sales, certain absolute
return products – for instance, Germany’s Allianz Total Return
bond fund – were quite successful.
In the alternative investment market, Europe continues to
witness a proliferation of products with complex investment
structures and techniques, causing regulators to rethink their
approach toward alternative investments. The European
Commission has set up an expert group on alternative invest-
ment funds to analyze the current organization of alternative
investments. A white paper with recommendations on invest-
ment funds is scheduled for release in October 2006. In the UK,
the Financial Services Authority plans to consult the industry
about creating authorized, onshore funds of hedge funds in
order to rectify the anomalous situation whereby exposure to
hedge fund investment techniques could be achieved by retail
investors through a growing number of structures, but not
through an authorized fund structure.
The rush to develop alternative assets will continue. New hedge
fund launches in Europe rose by nearly 33% to 330 in 2006,
raising $27.8 billion, up 22% from 2005, according to the
magazine EuroHedge. A handful of established hedge fund
managers raised the bulk of the cash, underscoring the impor-
tance of a track record when courting investors.13 It is increas-
ingly difficult to raise capital without an existing infrastructure,
a strong business plan and established compliance processes.
4. Better manage risk
Risk management is another major area that survey respondents
cite as a key driver of profitability. Three major areas of risk
stand out: operational risk, reputational risk and market risk.
Operational risk is top of mind for the asset management
executives who responded to our survey. Fifty-five percent
identify operational risk as one of the key drivers of future prof-
its, of greater concern than market (credit and liquidity) risk,
which they are generally able to manage more effectively.
Closely tied to operational risk is reputational risk, since opera-
tional missteps can severely tarnish a firm’s reputation. In inter-
views with senior executives, reputational risk was most often
cited as the top concern in coming years. Most of the execu-
tives interviewed believe that reputation is critical to success
and that it needs to be managed throughout the business
rather than solely through the public relations department.
“Managing our brand is operational; it’s public relations and it’s
strategic,” says Jonathan Russell, managing partner and global
head of buyouts at London-based 3i Group.
Driving the focus on compliance, operations and internal audit
is a heightened awareness of the reputational risk stemming
from noncompliance. In the US, asset management firms
untouched by the recent market timing and late trading scan-
dals (such as Fidelity, Capital Group and Vanguard) have accu-
mulated large sums of new assets at the expense of other fund
groups that saw their reputation suffer.
5. Adapt to demographic shifts
The asset managers who responded to the survey cite demo-
graphic changes as a final driver of profitability over the next
three to five years. A greying population is moving from wealth
accumulation to a lengthy retirement. Nearly three out of four
asset management industry survey respondents (73%) see these
customers driving a shift in demand among types of financial
products.
It has been estimated that by 2025, between a quarter and a
third of the US population will be in retirement and the median
age will stand at 39, up from 29 in 1975. The story is the same
throughout the developed world and even in parts of the devel-
oping world. In Germany, Spain, Italy, Switzerland and Japan,
the median age will be between 49 and 52; in Korea, 43; and
in China, 39, the same as in the US (though China faces the
risk that it may get old before it gets rich)14.
For the asset management industry, the single biggest question
is what new products and services these people will buy to
assist with their financial security. A number of asset manage-
ment firms are focusing on building a geographically broad-
based advisory capability, protection products and a portfolio of
lifecycle products that anticipate these changing customer
needs. Some US firms are developing products to serve the
The World Is Getting Older, Progressive Policy Institute, February, 2004
14
The Next Generation, Robert L. Reynolds, The Wall Street Journal, November 28, 2005
15
needs of an aging customer base. These include guaranteed
income products, asset protection products, reverse mortgages
and improved variable annuity products.
The defined contribution market is also developing in many
regions – from Australia, where it is entrenched, to Japan,
where in 2000 pension reforms were passed introducing
defined contribution plans to the market, but the reforms are
viewed as too restrictive to realize the benefits, to Taiwan and
Korea, where recent legislation has created opportunities. To
sustain long-term growth, account managers who have focused
on the defined benefit market will need to extend their reach
to the defined contribution market and to retail investors. They
will have to establish relationships with fund platforms, financial
advisers and brokers. Ultimately, the defined contribution mar-
ket will blur the distinctions between institutional and retail, as
fund managers use the corporate customer to leverage a rela-
tionship with the individual.
The US fund group Fidelity has proposed measures to increase
the use of defined contribution plans, since nearly one-third of
eligible US workers do not join, only one in 10 saves the legal
maximum and few workers are saving enough to support them-
selves in retirement. Among the suggested reforms are auto-
matic plan enrolment, increases in contributions to match pay
raises and the offering of lifecycle funds as the first savings
option. Fidelity predicts that these reforms would double the
retirement savings of low-income workers and, in combination
with Social Security, bring these workers to 100% of pre-retire-
ment earnings.15
Looking ahead
Despite the challenges they face, most of the asset manage-
ment executives surveyed indicate that their revenues will
increase during the next three to five years. The asset manage-
ment firms that grow will share several characteristics. First,
continued growth, whether through acquisition or merger, new
product introductions or expanded global distribution is an
important focus as it significantly impacts future profitability.
Second, firms that lose the trust of customers also tend to
impede future growth in revenue and profitability. A firm-wide
commitment to controlling operational risk and running a com-
pliant organization can confirm that the firm’s reputation
remains intact. Finally, the need to anticipate the market’s
changing demographics suggests that asset managers should
focus continued attention on advice and products tailored to
the needs of an aging global population.
DTT Member Firm Asset Management Industry Leaders

Americas France Spain

Jean Pierre Vercamer Rodrigo Diaz
Bermuda
Partner Partner
Bill Jack
Deloitte & Associés Deloitte, S.L.
Partner
+33 1 40 88 22 03 +34 91 514 20 21
Deloitte & Touche
jvercamer@deloitte.fr rodiaz@deloitte.es
+1 441 299 1300
billjack@deloitte.com
Gérard Vincent-Genod United Kingdom
Partner David Barnes
Canada
Deloitte & Associés Partner
Don Wilkinson
+33 1 40 88 22 98 Deloitte & Touche LLP
Partner
gvincentgenod@deloitte.fr +44 20 7303 2888
Deloitte & Touche LLP
djbarnes@deloitte.co.uk
+1 416 601 6263
Germany
dowilkinson@deloitte.ca
Norbert Bruehl
Partner Asia Pacific
Cayman Islands
Deloitte & Touche GmbH
Glen Wigney Australia
+49 69 75695 6037
Partner Sarah Woodhouse
nbruehl@deloitte.de
Deloitte & Touche Partner
+1 345 814 2202 Deloitte Touche Tohmatsu
Ireland
gwigney@deloitte.com +61 2 9322 7510
Ronan Nolan
sawoodhouse@deloitte.com.au
Partner
United States
Deloitte & Touche
Garry Moody China (People’s Republic of)
+353 1 417 2250
Partner Wade Deffenbaugh
rnolan@deloitte.ie
Deloitte & Touche LLP Partner
+1 617 437 2750 Deloitte Touche Tohmatsu
Italy
gmoody@deloitte.com +852 2852 6629
Riccardo Motta
wadeffenbaugh@deloitte.com.hk
Partner
Deloitte & Touche S.p.A.
Europe and Africa Japan
+39 02 833 22 323
Dean Maines
Austria rmotta@deloitte.it
Partner
Wolfgang Fritsch
Deloitte Touche Tohmatsu
Partner Luxembourg
+81 3 6213 3068
Deloitte Wirtschaftsprüfungs Yves Francis
dean.maines@tohmatsu.co.jp
GmbH Partner
+43 1 53700 3900 Deloitte SA
Yoshihiko Suzuki
wfritsch@deloitte.at +352 451 452 248
Partner
yfrancis@deloitte.lu
Deloitte Touche Tohmatsu
Robert Pejhovsky
+81 3 6213 3173
Partner Mauritius
yoshihiko.suzuki@tohmatsu.co.jp
Deloitte Wirtschaftsprüfungs Chandra Gujadhur
GmbH Partner
Korea
+43 1 53700 4700 Kemp Chatteris Deloitte
Nak Sup Ko
rpejhovsky@deloitte.at +230 203 8000
Partner
cgujadhur@deloitte.com
Deloitte Anjin LLC
Belgium
+82 2 6676 1103
Frank De Jonghe Netherlands
nko@deloitte.com
Partner Frank Maertens
Deloitte Business Advisory Partner
Singapore
CVBA/SCRL Deloitte Financial Advisory
William Lim
+32 3 800 88 89 Services B.V.
Partner
+32 497 51 53 74 +31 20 582 5444
Deloitte & Touche
fdejonghe@deloitte.com fmaertens@deloitte.nl
+65 6216 3173
wilim@deloitte.com
Denmark South Africa
Jens Hoeck George Cavaleros
Taiwan
Partner Partner
Ray Chang
Deloitte Statsautoriseret Deloitte & Touche
Partner
Revisionsaktieselskab A/S +27 21 670 1617
Deloitte & Touche
+45 36 10 34 26 +27 82 558 5737
+886 2 2545 9988 ext. 3029
jhoeck@deloitte.dk gcavaleros@deloitte.co.za
raychang@deloitte.com.tw
About Deloitte
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