Welcome to Thoughts on the Market.
I'm Betsy Grasick, Morgan Stanley's US large-cap banks analyst and global head of banks and diversified finance research.
And I'm Mike Cypress, head of U.S. brokers, asset managers, and exchanges research.
The asset management and wealth management industries are on the cusp of major consolidation.
We're going to unpack today what's driving the race for scale and what it means for investors and the industries at large.
It's Monday, October 13th at 4 p.m. in New York.
Mike, before we dive into the setup for M&A, I did want to get out here on the table.
What's your outlook for the asset management industry?
Sure.
So asset management today is called 135 trillion industry in terms of assets under management that are managed for a fee.
We expect it to grow at about an 8 clip annually over the next five years, and that's driven by faster growth in private markets, solutions and passive strategies, while we expect to see slower growth in the core active arena.
Two key drivers of growth there.
First, private markets.
We expect to see rising investor allocations from both institutional investors, but also, more importantly, from retail investors that remain early days in accessing the asset class.
So, as we look out in the coming years, we do expect this democratization of private markets to play out.
And we see that being helped by product innovation, investor education and technology advances that are all helping unlock access.
Second growth driver is solutions.
And I think you're looking at me a little dazed on what solutions.
And by that we really mean products and strategies that are addressing demographic challenges around aging populations.
So think about that as solutions that provide for retirement income, as well as those that offer tax-efficient solutions.
So think about that as model portfolios, as well as sub-advisory mandates.
We also expect to see growth in outsourced chief investment officer or OCIO mandates and broadly retirement-focused products.
So that's the asset management industry in terms of our outlook.
Betsy, what's your outlook for the growth in the wealth management industry?
Well, somewhat similar, but a little bit slower, off of a larger base.
What does that mean?
So we are looking for global growth in wealth management of 5.5% CAGR.
And that is off of a base of $301 trillion, which is intriguing, right?
Because that's larger than the $135 trillion you mentioned for asset management.
So in wealth, we were expecting $301 trillion in 2024 grows to $393 trillion in 2029.
And within the wealth industry.
What we see as the driver for incremental opportunities here is both in the ultra high net worth segment as well as the affluent segments, as client needs evolve and technology delivers improving efficiencies.
And I think one of the interesting things here, as we think about the look forward from an industry perspective, is the fact that both asset management and wealth management industries have been very fragmented for a very long time, especially relative to other financial industries.
I think one reason is that they need less capital to operate successfully.
But Mike, back to the asset management industry specifically, deal activity seems to be inching up.
What are you attributing this increase in M&A to?
Yeah.
So we do see M&A picking up and we expect that to continue over the next couple of years.
A number of reasons for that.
First, growth is becoming a bit more scarce with clients working with fewer partners.
And over the next five years, we expect the number of available slots to continue to decline upwards of a third, which concentrates growth opportunities.
Wait, wait, wait.
Upwards of a third and number of slots.
When you say number of slots, you're talking about it from the asset manager client perspective?
Correct.
From the asset owner standpoint or intermediary standpoint.
They're looking to consolidate their providers?
Correct.
They're looking to work with fewer asset managers.
At the same time, the winners are taking more share.
So our work shows that the largest firms are disproportionately capturing a larger share of net new money as they leverage their scale to reinvest in capabilities as well as in relationships.
And also I'd point to the fact that we have seen a pickup and deal activity already and we think that's going to lead more firms to consider strategic activity themselves as they think and rethink what constitutes scale.
And we think that that bar is rising and firms are thinking about how to compete effectively as the landscape evolves.
And look, this is all in the context of...
Already, a lot of challenges and change is happening, as you think about evolving client needs, the rising cost of doing business, whether it's investing for growth or even harnessing AI, and that's all pressuring profitability.
We think this is particularly a challenge for those midsize money managers that are multi-asset, multi-liquid and global, those with call it half a trillion to two trillion in size, making them more likely to pursue investing consolidation opportunities to bolster their capabilities and scale, while also generating cost efficiencies.
So now looking forward, what type of deals do you expect and how does it differ from past years?
Sure.
So a few things are different than past years.
First is that the deal activity is encompassing many forms of partnership.
And we think that this experimentation around partnership will only accelerate.
That allows, for example, for private market managers to access retail distribution without owning the end infrastructure and the last mile to the customer.
It also allows traditional managers to provide their retail customers with access to high-quality private market strategies from well-known and branded firms.
Second, is we see a broadening out of the types of acquisitions themselves when we talk about MA right.
So three types of deals.
First are deals within the same vertical or interest sector.
So think about this as an asset manager buying another asset manager to acquire capabilities, to gain cost synergies or bolster distribution.
Second type of deals that we're seeing are ones that expand beyond one's own vertical, so intersector deals, asset management combining with wealth or insurance, for example, where firms would seek to own a larger, greater portion of the overall value chain.
And so these firms are getting closer to that end client, for example an asset manager getting closer to that end customer.
And the third type being financial sponsor deals, where a sponsor is investing either in an asset or a wealth manager.
Now, you didn't ask me around the historical outcomes of MA, but I would say that the historical outcomes have been mixed in the asset management space.
But here we think that the opportunity ahead is so great that we think firms will find ways to navigate and pursue strategic activity.
But it does require addressing some of the culture and integration challenges that have plagued some of the deals in the past.
Okay.
So Betsy, what do you see as the key drivers of consolidation in wealth management?
There's several.
From the wealth manager side.
Number one is an aging population of advisor and advisor owners and the need to address succession and how to best serve their clients when passing on their book of business.
So we've got succession issues as the number one driver.
But additionally, The need for scale is clearly getting higher and higher, given the costs of IT infrastructure rising, the needs to be able to leverage AI effectively and to manage your cyber risk effectively.
These are just some of the drivers of desire to merge from the wealth manager perspective.
Second, we have... an increasing buying pool.
If you just look at the large cap banks, for example, significant amount of excess capital.
Could we see some of that excess capital be put to work in the wealth management industry?
To me, that would make sense.
Why?
Because wealth management is one of the best, if not the best, financial institution service for shareholders.
It is a high ROE business.
It also is a business that commands a high multiple in the stock market.
So we would not be surprised to see activity there over the course of the next several years.
So Mike, thanks for joining me on the show today.
Thanks, Betsy.
Always a pleasure.
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