How Small Financial Firms Can Compete with Larger Firms

September 20, 2018 - Stephen Van de Wetering

The challenges asset managers face will render smaller firms less able to compete and vulnerable to larger competitors, who will take a bigger share of the market and profit pools.

Asset managers must deal with challenges of downward pressure on fees and rising costs to protect their profits while simultaneously taking steps to preserve their market share, whether it’s offering more attractive investment products or reaching out to new markets.

Bain Insights believes the “collapse” of smaller to medium-sized asset management companies with no cost or competitive advantage “figures a highly likely scenario.”

Unequal Outcomes in Asset Management

Strong market conditions have allowed for most asset managers to experience growth in assets under management (AUM) in 2017, but the performance varied.

The Boston Consulting Group stated that the top-quartile of asset managers had 17% AUM growth or 6% net flow, while the bottom-quartile had 6% AUM growth or 1% net flow. In addition, when only accounting for asset managers with net inflows, the top ten accounted for 85% of inflows.

Growth in profits may not be dispersed equally either. Bain predicts that the the gap in profits between the top and bottom 10% of companies will rise from 10 basis points in 2018 to 13 points by 2022. In addition, the firm believes the profit pool size in 2022 to be the same size as it was in 2007.

Small Financial Firm Challenges in All Directions

Lower Fees  

Client demand, particularly from large institutional investors and retail distributors, is contributing to the downward fee pressure on asset managers.

According to research from Cerulli Associates, asset managers have seen the average, asset-weighted fee for a U.S. equity fund fall from 85 basis points in 2012 to 72 bps in 2017, an annual drop of nearly 10%. The average taxable fixed-income product fee declined from 66 bps to 55 bps, which is a 13% annualized drop during that same period.


Technology is like a double-edged sword when it comes to investment management: adopting the latest technology as your competitors contributes to the downward trend of lower fees, but if you’re not using any of the newest developments and/or have struggle with implementation, you lose a competitive edge.

Bing Waldert, a director at Cerulli Associates, believes that new technology is partly to “blame” for lower fees.

“Automation will lower the cost of transactions, bringing down fees in wealth management,” stated Waldert. “In addition, digital advice platforms emphasize asset allocation, which pressures fees in individual asset manager products and benefits exchange-traded funds.”


According to a Thomson Reuters report, which surveyed 800 compliance practitioners across banks, insurers, broker-dealers and asset managers, the practitioners say managing and coping with continuing regulatory change is their biggest challenge, referencing laws around data privacy and GDPR as a key concern.

Markets in Financial Instruments Directive (MiFID) also adds another layer of compliance requirements. In order to improve how financial markets function and strengthen investor protection, MiFID will require firms to devote resources to staying in compliance. (Our previous blog details how MiFID works and the the operational implications for investment management operations.)

Given the attention to regulatory matters, increased spending on compliance would not be a surprise.

61% of firms were expecting an increase in their total compliance budget in 2018 (53 percent in 2017), as stated in the Thomson Reuters report.


Asset management challenges for small- and medium-sized firms are complicated further by larger competitors’ ability to react to the changes:

And it’s not just about the larger asset management firms’ ability to withstand the impact of lower fees; it’s that the larger firms could be the reason for lower fees.

Tim Buckley, the president of Vanguard, said, “As we continue to get scale, as we continue to grow and we get more efficient, we pass a large part of that back to our clients in the form of lower expenses. That’s not going to stop. If other people want to offer index funds, great. But you better be ready to keep lowering price, and we’re going to do it across every product.”

“Fee wars” between juggernauts like Vanguard, Fidelity, and BlackRock will only put pressure on the smaller firms in a bid to keep up.

How Small Financial Firm Can Overcome the Challenges

Offer More Compelling Investment Products

Bain Insights says there are product niches that currently stand out as good opportunities: themed multi-asset funds investing in such topics as mobility and clean technology; socially responsible investments; and alternative investments such as hedge funds, infrastructure and real estate. If executed well, Bain believes they could command higher fees.

Leverage Technology

New technology for data analysis, decision-making (AI), and report generation makes the work not only easier, but also scalable.

BlackRock, for example, also uses the technology to scale up, and by focusing on increasing automation in portfolio investment to cut costs, and more efficient product selling via platforms, which are cheaper, faster and more convenient for clients.

Robotics and automation tools can be used for data reconciliation and producing client material, which follow rule- and judgement-based approaches, respectively. A Boston Consulting Group report stated these kinds of resources can reduce costs “by 30% to 40% across targeted areas.”

Though technology requires a big investment, the investment may be worth it if implemented successfully.


Outsourcing operational functions is another possible way to reduce expenses and achieve scale.

These firms can leverage asset managers’ technology, taking away the risk and hassle of in-house implementation.

Reporting, billing, cost basis, and IT services are some of the tasks a third-party can provide, and outsourcing back-office functions can solve other operational problems like employee turnover and key-personnel risk.

Expand to New Markets

In addition to offering more attractive products, the other way to grow is by entering new markets, China being the most notable.

Recent financial reforms in China give foreign firms increased, but still limited, access to the world’s 4th largest asset management market (behind the US, UK, and Japan). Per BCG, China was the 8th largest asset management market in 2011 with $1.1 trillion in AUM, and by 2016, it became the 4th with $3.6 trillion.

The reforms in China have increased the need for asset managers among pension funds and insurers, and regulatory pushes for transparency has resulted in increased use of traditional asset management products.

Given the large population, fast-growing economy, and what should be a long-term trend of easing restrictions on foreign firms, China holds a lot of promise.

Small Financial Firm Asset Managers Must Prepare Accordingly

Asset management challenges, in the form of lower fees and rising costs, do pose a threat to relatively smaller firms. Increasing compliance requirements and demands to adopt new technology further complicate an organization’s ability to cope with the challenges in asset management.

The downward fee pressure, in some ways induced by the largest asset management companies, will pressure small- and medium-sized firms’ bottom lines, requiring improvements in all sectors of the business.

By offering a more competitive mix of products, leveraging the technology, outsourcing, and expanding into new markets, asset managers can find their low-cost or competitive advantages, sparing them from the “highly likely scenario” of a “collapse” that Bain predicted.