Trump Win Won't Change Trends in Asset Management

While news of Donald Trump's election has sparked a rally in the shares of the U.S.-based asset managers, we think an overturning of the Department of Labor fiduciary rule, although more likely, does not alter the long-term secular trends affecting the industry. If anything, a reversal of the DOL rule will decelerate what we had expected to be an acceleration of the fee and margin compression we envision for the industry--driven by poor relative active investment performance and the growth and acceptance of low-cost ETFs. We continue to prefer wide-moat-rated

The shift from active to passive management has been going on for more than two decades, with the emergence of lower-cost ETFs accelerating this trend. We continue to forecast 10%-14% organic growth for ETFs during the next five years, albeit at the lower end of that range now as the industry was expected to get a lift from full implementation of the DOL rule. We expect organic growth to remain in the double digits longer term, supported by an ongoing transition from transactional brokerage and commission-based advisory relationships to fee-based structures. We also expect to see organic growth in the 6%-7% range for index-based mutual funds, which is a stark contrast to the flat to negative organic growth produced by active U.S. equity fund managers the past decade. With most active managers failing to beat the market consistently, we don't see this trend reversing itself.

With the DOL ruling putting a larger microscope on fees and performance, and many broker-dealer and advisory networks already culling their platforms of poorer performing (and higher-costing) products, fees are still likely to come under pressure, with asset managers having to spend more not only to produce better investment results, but also to stay relevant on third-party platforms.

The two largest gainers in the group today--

Separately, we believe it may require quite a bit more effort than investors are anticipating to reverse many of the changes that have already been initiated ahead of full implementation of the fiduciary rule, let alone repeal the rule (which starts being phased in next year in April). Logistically, it would be difficult for either a newly sworn in President Trump or Republican-controlled Congress to eliminate the rule, which was created through administrative process, in less than three months' time. On top of that, a fair number of broker-dealer and advisory networks have already announced operational plans, and voiced public support for the fiduciary standards, making it difficult to halt the momentum of firms that have already chosen to go down this path. As we mentioned above, this whole process, which started back in 2015, put a much larger microscope on fees and investment performance, raising the competitive hurdles for asset managers looking to get placement on broker-dealer and advisory platforms. Eliminating the rule, if (and when) that happens, would do little, in our view, to change the heightened focus that has already been placed on fees and investment performance, which have begun to alter some of the competitive dynamics for the industry.

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