The North American asset management industry faces a conundrum. The 2023 recovery appears to be accelerating in 2024, but the industry has struggled to regain its financial footing. Revenues have stagnated amid outflows from higher-fee active equity mutual funds and a period of adjustment in the private markets. And profitability has remained under pressure amid rising costs.
The good news: lifted by strong market performance and healthier net flows, the industry’s global assets under management (AUM) reached a record $132 trillion as of June 2024. The bad news: 2023 revenues were essentially flat compared with the previous year and profits shrank 5 percent.
Certain asset management companies have still been able to achieve above-market growth, but share gains amid stagnant industry economics only get organizations so far. Outsize growth needs to come from new pools of assets outside the industry.
Fortunately, new opportunities are prevalent because of disruption and dislocation in the balance sheets of banks, insurance companies, and high-net-worth investors. By our estimates, these changes could bring the industry $8 trillion to $10 trillion of new managed assets over the next decade.
This year’s report explores the following six themes:
- the unevenness of the industry’s rebound from a weak 2022, with considerable variation across regions, channels, and product types
- the nature of the revenue-neutral recovery of 2023, driven in large part by lower-priced investment strategies attracting the bulk of recovery inflows
- the pressures on profitability, including the upward creep in the industry’s cost base, despite 2023 purportedly being “the year of austerity”
- the shifting basis of competition as several of the largest asset managers continue to gain market share, and as the traditional focus on investment performance alone is no longer considered a surefire way to succeed
- an opportunity beyond the balance sheet—$8 trillion to $10 trillion that could be unlocked as banks, insurers, and individual high-net-worth investors restructure their allocations and holdings
- a new agenda for not just surviving but thriving in this rapidly shifting market environment—an agenda that North American asset managers should consider over the next 12 to 18 months
Our 2024 review of the industry shows an interesting dichotomy. On one hand, it’s a mature market defined by intense competition and declining profitability. On the other hand, it’s a growing landscape ripe with opportunities that exist just beyond the industry’s traditional domain. This report, which includes traditional and alternative asset managers, draws on McKinsey’s asset management work, including proprietary data assets, the Global Asset Management Survey, the Global Growth Cube for granular market sizing, and a set of regular “voice of the client” surveys across both wealth and institutional segments.
An uneven rebound
On the face of it, 2023 was a banner year for the global asset management industry—a relief after a dismal 2022. Yet the rising tide didn’t lift all boats, with select geographies and client segments disproportionately benefiting.
The Americas and the Asia–Pacific region accounted for over 90 percent of global net flows in 2023. In contrast, the recovery in Europe, the Middle East, and Africa has been limited. Asia–Pacific turned in the best results: it was the only region delivering an organic growth rate that was higher in 2023 than it was prior to the COVID-19 pandemic.
By client segment, high-net-worth individuals continued to be the industry’s most important source of organic growth. Buoyed by ascending asset values, rising wages, and continued low unemployment, the wealth channel accounted for nearly half the industry’s global net flows. In terms of asset classes, passive equity and fixed income (both active and passive) have been the big winners in the industry’s rebound. In private markets, 2023 fundraising by North American managers declined 18 percent from 2022. Numbers were down across private equity, real estate, and infrastructure, with private credit the only sub-asset class experiencing growth in 2023.
Beyond the recovery in flows, there’s considerable pent-up energy in the system in the form of cash sitting on the sidelines. Using individual investors as an example, as of the first quarter of 2024, US households had accumulated $8.5 trillion in deposits and money market funds at elevated rates, which meant that, for the first time in over a decade, investors were being paid to wait on the sidelines. Based on historical averages of household balance sheets over the past 50 years, this pool of assets includes approximately $1.5 trillion of excess cash that could be invested in managed products.
A revenue-neutral recovery
Despite record AUM, revenues remained flat in 2023. That’s in part because the 2023 market recovery didn’t pick up steam until the fourth quarter, but another factor is the continuation of shifts away from higher-cost products toward lower-cost asset classes and strategies.
The 2023–24 recovery in net flows has been concentrated in lower-yielding passive and fixed-income products. Meanwhile, higher-yielding products, including active equities, have been in outflows.
Margins under pressure
Despite the recovery in markets and net flows, the North American asset management industry’s profitability fell in 2023. The pretax operating profit margin declined two percentage points, pushed down by flat revenues and higher costs (Exhibit 1).
Climbing costs
Although multiple industry headlines have suggested that 2023 was a year of austerity, overall spending rose 3 percent, creeping back up to the record level of 2021. Spending increased across the board, with 3 to 5 percent increases across all functional areas except investment management, where it increased a more modest 1 percent.
Cost of complexity
Our analysis of 2023’s cost increases points to increased complexity in asset managers’ business and operating models as a root cause of the higher costs. Many asset managers have faced the accrual of a compounding operational debt that has pushed up the costs of running the business. In parallel, these managers also have had to ratchet up spending to keep pace with the emergence of new technology, such as generative AI (gen AI); increasing demand for a broader range of investment solutions; and a more fragmented client base.
Many organizations confronted these challenges with highly publicized layoffs. But concurrently, asset managers also added staff. Extrapolating from our 2023 survey of North American companies, the industry’s workforce rose by about 2,400 employees, or 1.7 percent.
A shift in the basis for competition
This past year marked the continuation of another trend: leading organizations are attracting a growing share of flows. Over the past four years, the share of US flows (or fundraising, in the case of private markets) captured by the top five managers has grown by anywhere from two to nine percentage points, depending on the asset class (Exhibit 2). The sole exception is passive strategies.
Beyond the industry-level rebounds in net flows, what accounted for leading asset managers’ success in 2023? We analyzed the financial results of the 30 largest asset managers in North America to identify the characteristics of companies that consistently generated the most substantial net-flow growth. We found that organizations that achieved organic growth during this period fell into four broad archetypes:
- large, at-scale manufacturers of passive investment strategies that rode the continued wave of client demand, particularly for ETF strategies that were useful for positioning portfolios in a more “risk on” environment
- distribution powerhouses with privileged access to clients—for example, through ownership of wealth or retirement channels
- investment solution innovators that were able to design and rapidly launch differentiated solutions to address client needs
- alpha generators with a consistent record of investment outperformance and a differentiated investment system well understood by clients
Opportunities beyond the balance sheet
Attractive opportunities are opening up through a balance sheet restructuring across the bank, insurance, and high-net-worth investor segments. Here are a few trends to watch:
- Banks are curtailing their lending activities and looking to offload more loans to third parties because of higher capital requirements from regulators. Private-capital companies are stepping in to fill the void.
- Insurers are shifting the way they invest their general accounts as private capital moves further into life insurance and annuities.
- Wealth intermediaries are increasing private-market allocations for their clients.
These trends are dislodging substantial assets from their traditional homes on institutional and retail balance sheets. By our estimates, this could bring $8 trillion to $10 trillion of US AUM into the asset management industry over the next decade (Exhibit 3). These opportunities beyond the balance sheet would represent a roughly 15 percent expansion of the addressable market for asset managers in North America.
Lending: Banks pull back, and asset managers gain
Big banks began pulling back from lending in the wake of regulations implemented after the 2007–09 financial crisis. The growth of nonbank providers as major sources of lending is entering its next wave, driven by three developments:
- Regulators are aiming to complete the implementation of a global banking overhaul begun after the financial crisis, a process known as the “Basel III endgame.”
- Banks are increasingly eager to manage their exposure to longer-dated lending, with recent deposit volatility increasing the complexities of managing long-duration assets.
- Nonbank providers are making inroads in lending markets.
As of 2023, US bank balance sheets held approximately $23 trillion of assets. We estimate that assets valued at roughly $5 trillion to $6 trillion could transition away from the banking industry over the next decade. To seize this opportunity, asset managers will need new capabilities that enable them to gain access to new pools of assets and new funding sources at a meaningful scale.
Private capital in insurance: New opportunities for asset managers
Private capital is moving deeper into the world of life insurance and annuities, opening further opportunities for asset managers. The convergence of private capital and insurance represents a shift in the paradigm of what it means to manage an insurance balance sheet. Insurers backed by private capital allocate an additional 11 percentage points of their general accounts to private credit and structured products, and an additional four percentage points to mortgages, displacing plain-vanilla holdings of fixed-income securities. The results are yields that are up to 50 basis points higher than those of traditional insurers.
We estimate that the addressable market for these liabilities could triple as more private capital flows into the insurance sector and the trend globalizes.
Private markets: Asset managers make inroads with individual investors
The asset management industry has been talking about the promise of retail alternatives for over a decade. The theory is that retail investors are severely underallocated to private-market investments relative to institutional peers. If the roughly 5 percent allocation to private markets in individual-investor portfolios today could be moved closer to the more than 15 percent allocation that’s the norm in institutional portfolios, one of the most exciting growth opportunities in the industry would be unlocked.
Over the past six years, the promise of retail alternatives has begun to bear fruit. In 2023, fundraising for nontraded real estate investment trusts (REITs) and business development companies (BDCs) in wealth-related channels totaled $28 billion. That’s more than five times the equivalent figure in 2018.
What accounts for this inflection point? In our view, three drivers have created a structural shift:
- Vehicle innovations and the rise of semiliquid products have helped remove the buying frictions associated with institutionally oriented closed-end fund structures that, in the past, had created considerable operational burdens around tasks such as managing liquidity.
- The new vehicles are reaching critical scale, allowing them to be approved more easily for inclusion on even the largest wealth intermediaries’ investment platforms.
- Large investments in the private-market-wealth ecosystem—salesforce, infrastructure, and education—are now supporting end investors and their advisers in their adoption of private-market products.
A new agenda for thriving, not just surviving
To not just survive but thrive, asset managers can consider embracing a four-part agenda:
- Tap into durable sources of demand. In some cases, this will require building capabilities in new areas; in others, action such as M&A.
- Create privileged access. Whether through ownership or partnerships with origination or distribution platforms, privileged access can confer an advantage in meeting client needs.
- Manage complexity and cost. Managers will need to make hard decisions about prioritization, including where not to compete. They will also need to invest in structures and processes that can scale when businesses expand not just twofold but tenfold.
- Unlock the potential of technology. Smart use of technology and AI has the potential to unlock insights and create efficiency that can make investment, distribution, and operations teams smarter and more effective.
After the challenges of the past few years, the asset management industry is showing signs of a recovery. Opportunities are available via traditional avenues but especially beyond them. Seizing these opportunities and achieving or maintaining industry leadership will require bold action.
