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Expect more global investment industry consolidation, predicts leading study

Investors will also shift to passive management funds while fund houses are expected to see thinner margins, CFA survey finds

PUBLISHED : Tuesday, 11 April, 2017, 8:03am
UPDATED : Tuesday, 11 April, 2017, 8:03am

More consolidation of the global financial services sector is needed, if the industry is to tackle its main challenges over the next few years, according to a new survey by the New York-based CFA Institute.

Its Future State of the Investment Profession report shows some 84 per cent of 1,145 respondents – senior executives from investment firms all over the world – said they believe there will be more mergers and acquisitions within the industry over the next five to 10 years, in every major market including US, Europe and Hong Kong.

The study concludes every strand of the financial industry faces inevitable consolidation, including fund houses, brokers, insurance and other investment firms, if they are to effectively compete.

They also face an ever-rising tide of new technological challenges, which will require considerable investment, with an emphasis on the development of so called “fintechs”, which will increasingly provide robot-based advisory services.

Those trends are already happening in Hong Kong, with rising numbers of mergers and acquisitions between mainland firms and brokerages and insurance companies in the city, for instance.

On the plus side, this helps bring in new money to the industry and provide more job opportunities but there are also hefty management challenges to handling these marriages successfully.

There have been 21 takeover deals within the Hong Kong insurance market alone since 2014, ten of them involving mainland buyers, according to the latest data from Thomson Reuters.

There have been 21 takeover deals within the Hong Kong insurance market alone since 2014, ten of them involving mainland buyers, according to the latest data from Thomson Reuters.

Another major challenge facing the industry, the study shows, is the fact more investors are opting for passive investment funds which charge lower fees, often involving little in the way of clients having to track stocks themselves.

It showed 70 per cent of respondents believe investors will increase their investment in vehicles such as exchange traded funds – bad news, of course, for active fund managers dependent on client fees.

Investment professionals also expect their profit margins to thin, due to keener competition, with 52 per cent of respondents expecting them to lower in the next 5-10 years.

Nearly 60 per cent believe institutional investors will look to reduce costs by hiring their own in-house staff to handle their investments.

Already Hong Kong is witnessing these trends first hand, a prime example being the city’s Mandatory Provident Fund reforms that started from April 1, requiring all MPF providers to lower their fees for default investment funds, with management fees capped at 0.75 per cent, other fees capped at 0.2 per cent, bringing total fees no higher than 0.95 per cent – considerably lower than the 1.56 per cent market average.

The general atmosphere in the industry is of tough times ahead, especially for pension managers.

The silver lining could, of course, be that as MPF fees continue to lower, that may also help encourage more people to voluntarily put in more money, meaning bigger fund sizes, which could bring in more fee income for fund managers.

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