McKinsey whitepaper

1. Financial Services Practice
Growth in a Time of Uncertainty
The Asset Management
Industry in 2015

2. Growth in a Time of Uncertainty
The Asset Management
Industry in 2015
Introduction 1
Improved Profitability Masks Medium-Term Challenges 4
Sustainable Growth Elusive for Most Firms 11
The Asset Management Industry in 2015 18
Weathering 2012 and Winning by 2015: Five Imperatives 27
For Management

3. Growth in a Time of Uncertainty 1
Introduction
By late 2010 and early 2011, the U.S. asset
management industry had demonstrated its
resilience and returned to form in the wake of the
financial crisis. Assets under management (AUM)
had rebounded to their pre-crisis peaks, overall profit
margins were up by 5 percentage points from crisis
lows – and back to their long-term average in the
high 20s – and the double-digit cost and
compensation increases of 2010 were on track to
repeat themselves. At the start of 2011, even
pessimists seemed to believe that the good old days
were making a comeback.
Market volatility and the renewed risk of financial earthquakes in the
second half of 2011 not only put a damper on this optimism, but also
called into question some of the industry’s beliefs about the inevitability
of profitable growth. Today, leaders of asset management firms are ex-
pressing deep uncertainty about the future direction of markets and
turning their focus to the next quarter’s margin rather than thinking
strategically about longer-term growth.
To gain insight into how asset management firms can generate
growth in a time of uncertainty, McKinsey undertook a multifaceted
research effort, reviewing the past decade of results from its annual
benchmarking of U.S.-based asset managers, conducting a com-
prehensive analysis of thousands of metrics from hundreds of asset

4. Growth in a Time of Uncertainty 2
management firms, and interviewing dozens of industry leaders. The
major findings from this research include:
• While overall profitability has been strong for most firms through the
cycle (averaging 28 percent), deeper structural issues remain. Even
when assets peaked in early 2011, overall profit levels remained more
than 20 percent below pre-crisis levels, due to increased costs, re-
duced productivity and lower pricing.
• Growth has proven far more elusive than profitability, with only one in
five asset managers sustaining above-average growth rates over the
past decade. Moreover, the sources of growth were surprising. Invest-
ment performance explained only one-third of growth; generalist busi-
ness models seemed to underperform; and scale was not much of a
factor. Finally, while M&A had a modest impact on growth industry-
wide, for the top firms, it was a significant factor.
• The market appears to place a higher premium on sustained above-
average growth than on top-quartile profitability. However, most
asset managers lack the conviction to make significant and contin-
ued investments in growth. There is also a broad consensus around
the trends that are driving growth, but that consensus has not
translated into proportionate business investments. While caution is
understandable in times of market volatility, the reluctance to invest
in growth was evident even in 2010, which saw double-digit cost
increases, but only 2 to 3 percent of those increases directed to-
ward growth.
• McKinsey developed seven quantitative predictions regarding how the
industry might evolve in 2015, from growth in retirement solutions, re-
tail alternatives and ETFs, to the pace of international expansion, the
need for greater cost discipline, and the role of M&A and winning busi-
ness models. While management teams may disagree about the pace
and magnitude of these changes, the intent of these forecasts is to
stimulate debate and greater conviction around a path forward for
asset management firms.
• This report also presents a five-part management agenda with critical
questions that every asset management executive team should con-
sider as they position their firm for the years ahead.

5. Growth in a Time of Uncertainty 3
Over the past decade, management teams that made deliberate and in-
formed choices about where and how to compete and invested in and
executed on those convictions were much more likely to generate sus-
tained growth and profitability. Volatility and uncertainty in the global
capital markets, the regulatory landscape and the global economy will
likely continue for some time. While asset managers will need to recog-
nize and respond to these uncertainties, they will also need to be more
deliberate about where and how they pursue growth.

6. Growth in a Time of Uncertainty 4
Improved Profitability Masks
Medium-Term Challenges
The U.S. asset management industry continues to
be the most consistently profitable business in
financial services. In 2010, after the massive
market swings of the prior two years, the industry’s
pre-tax operating margins rebounded by 5 points to
27 percent, just shy of the 10-year average of
28 percent (Exhibit 1, page 5). This margin recovery
was supported by double-digit growth in AUM in all
long-term asset classes, led by higher fee
alternatives and international equities.
The return to “normal” levels of profitability, however, masked increasing
variability among individual firms’ profitability. The top quartile of asset
managers earned an average margin of 46 percent in 2010, approximately
40 percentage points higher than the bottom-quartile of the industry. Im-
portantly, this variance in margin was not explained by a firm’s overall scale
(Exhibit 2, page 6), but by choices firms have made about their business
model, product scale and operating discipline and by their degree of frag-
mentation around growth opportunities.
And while AUM in the second quarter of 2011 surpassed pre-crisis
peaks, overall industry profit pools remained 15 percent lower than pre-
crisis highs due to escalating costs and continuing pressure on revenue
yields. Moreover, with sharp market declines in the third quarter of 2011
erasing most of the year’s gains in average AUM and revenue, profit
pools are likely to fall even further (Exhibit 3, page 6). With the market

7. Growth in a Time of Uncertainty 5
Exhibit 1
The market recovery helped firms improve average operating profit
margins to 27% in 2010
Pre-tax profit margin for asset managers in the survey
Top third
Percent average
51 Overall
49 49 average
48 48 47
46
43 42
40
33
31 31
30
28 27
27 26
25
22
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: 2011 McKinsey/U.S. Institute Asset Management Benchmarking Survey
proving unreliable in 2011 and 2012, asset managers will need to tackle
the business model issues at the center of rising costs, lower prices and
high variability of margins, or risk structurally lower profitability in the
years ahead.
Costs outpace growth
For the past two years, costs in the asset management industry have out-
paced revenue growth, reaching new record-high levels by the middle of
2011. In 2010, asset managers’ costs grew by an average of 11 percent,
surpassing previous highs reached in 2007 and outpacing annual growth in
AUM and revenues. Cost escalation was an industry-wide phenomenon, as
a whopping 87 percent of firms upped spending during the year (Exhibit 4,
page 7). And until the market volatility of the third quarter of 2011, this
pattern continued – with most asset managers increasing their costs by a
10 percent run rate in the first half of 2011.
The root causes of higher costs in 2010 were increases in headcount, aver-
age compensation and non-compensation-related expenses in all functional

8. Growth in a Time of Uncertainty 6
Exhibit 2
Variance in profitability among firms is not explained by overall scale
Pre-tax operating margins versus AUM for U.S. asset managers
Profit margin
Percent
70
60
Correlation = 0.15
50
40
30
20
10
0
-10
0 50 150 300 1,000
AUM
$ billion
Source: 2011 McKinsey/U.S. Institute Asset Management Benchmarking Survey
Exhibit 3
Operating profits improved in 2010 but will likely be flat or fall in
2011 due to market declines and cost growth
100 = 2007 results indexed
Average AUM Revenues Expenses Profit
107
100 100 100 101 100
96 94 92 94 96
90 90 90 90
86
78 76 75
55
2007 08 09 10 11F1 2007 08 09 10 11F 2007 08 09 10 11F 2007 08 09 10 11F
1
McKinsey forecasts, based on 3Q 2011 reported results
Source: 2011 McKinsey/U.S. Institute Asset Management Benchmarking Survey; Merrill Lynch

9. Growth in a Time of Uncertainty 7
Exhibit 4
Almost all asset managers saw costs increase in 2010, within
all functions
Percent change, 2009-2010 Percent
of cost
Change in $ costs Change in costs by function base, 2010
70 13% 87%
Investment
12 38
management
60
Sales and
marketing 7 19
50
40 Management/
11 12
administration
30
Technology 9 12
20
10 Operations 8 7
0
Other1 2 12
-10
1
Includes occupancy, legal, non-sales-related T&E, and other general expenses (e.g., insurance, temp, etc.)
Source: 2011 McKinsey/U.S. Institute Asset Management Benchmarking Survey
areas. Investment management and management/administration costs rose
the most (12 percent and 11 percent), fueled primarily by higher compen-
sation linked to rising AUM and profit levels. Operations and technology
costs increased 8 percent and 9 percent, respectively, driven by higher
headcount and compensation costs as well as a jump in non-compensa-
tion costs due to higher direct technology expenses and outsourcing costs.
Expressed relative to assets, operations and technology costs have risen
every year since 2005 – from 3.5 basis points (bps) to 5.1 bps in 2010,
seemingly defying theories about economies of scale. Finally, sales and
marketing costs rose 7 percent, despite a slower sales environment and
firms reining in direct marketing spending.
Although costs were higher across the industry, it is important to distin-
guish between the motives and performance of individual firms. Those
that used the crisis to restructure their models (referred to in our 2010
report as “Decisive Operators” 1 ) performed best by a wide margin. Hav-
1 See “The Asset Management Industry: Now It’s About Picking Your Spots,” McKinsey & Company, September, 2010.

10. Growth in a Time of Uncertainty 8
Exhibit 5
Net revenue yields held steady in institutional in 2010, but improved
in retail
Retail net revenues/AUM Institutional net revenues/AUM
Bps Bps
59
53 54
51
48 47
45 46 45
43 42 41
39
36 35 37
34 35 35
33
2001 02 03 04 05 06 07 08 09 2010 2001 02 03 04 05 06 07 08 09 2010
Source: 2011 McKinsey/U.S. Institute Asset Management Benchmarking Survey
ing made tough decisions early in the crisis to restructure their operating
model (reducing costs by a third from 2007 to 2009 and cutting back on
or exiting lower-margin businesses), these firms were in the best position
to make selective investments for growth in 2010. Thus, while their costs
relative to assets increased slightly by 0.3 bps in 2010, pre-tax operating
margins for this group grew to 33 percent. In contrast, the “Depressed
and in Denial” firms that failed to act through the crisis belatedly cut costs
in 2010 by 0.7 bps (around 3 percent of costs). The market gains in 2010
helped them improve their profit margins in 2010, but this group contin-
ued to lag the industry (18 percent operating margin overall) and lacked
the resources to invest in growth.
Revenue yields hold steady in 2010, but long-term prices
continue downward trend
Revenue yields (net revenues over AUM) held roughly steady in 2010, but this
was due to shifts in mix rather than improved pricing power (Exhibit 5).
Viewed over a full business cycle, net revenue yields for the industry have
proven to be rather cyclical, but with an overall long-term downward trend

11. Growth in a Time of Uncertainty 9
Exhibit 6
Net revenue yields on many institutional products improved in 2010
but remain below 2006 levels
2006-2009, Net revenues in bps
Percent
change
2006 2009 2010 2006-10
Higher Hedge funds 213 100 202 -5
alpha
strategies
FoFs (HF, PE) n/a 81 87 n/a
Real estate 102 70 88 -14
International equity 53 49 50 -6
Traditional/ Large-cap 41 40 41 0
core
Taxable FI 18 18 21 +12
Money market 12 8 7 -40
Beta-driven Quant active 32 32 31 -3
strategies
Pure index 7 5 6 -14
Overall change: -6%1
1
For 2006 mix, not all asset classes listed
Source: 2011 McKinsey/U.S. Institute Asset Management Benchmarking Survey
due to pricing pressure. Holding mix constant at 2006 levels, net revenues on
third-party AUM (i.e., excluding general account assets) have declined by
close to 10 percent over the last five years.
In retail asset management, net revenue yields continued to improve in 2010
from crisis lows, increasing to 47 bps from 45 bps in 2009, driven by shifts
into equities. This is still far below the 59 bps earned early on in the last
market cycle and masks declining prices on core asset classes such as
large-cap, international equity, money market and index over the past five
years. Retail pricing will likely remain under pressure due to increased com-
petition from lower-fee ETFs and passive products and greater consolidation
on the distribution front. With the top five advisory firms controlling 55 per-
cent of U.S. household assets and earning margins that are half those of
asset managers, long-anticipated demands for higher revenue-sharing are
starting to materialize. Most asset managers are unprepared for this shift in
their retail models.

12. Growth in a Time of Uncertainty 10
On the institutional side, net revenue yields remained steady at 35 bps in
2010. While there was a slight shift in the mix of asset towards equity and al-
ternative products, prices in core asset classes remained flat overall in 2010.
However, over the past five years, institutional prices have declined in all
core or traditional asset classes except taxable fixed-income (Exhibit 6, page
9). Holding mix constant at 2006 levels, overall institutional revenues have
declined by 6 percent – a trend that is not likely to reverse for core or tradi-
tional asset classes.
The return to long-term average profitability in 2010 and early 2011 therefore
masks some structural issues that asset managers will continue to face,
namely increased variability of profit margins, negative operating leverage
(even in an upturn) and continued price declines. While average profit mar-
gins may not return to pre-crisis levels in the mid-30-percent range and may
well decline from the high 20s if these issues are not addressed, they will
likely remain healthy relative to those of other financial services businesses.
The larger challenge for the industry is growth, especially in a period of in-
creased uncertainty.

13. Growth in a Time of Uncertainty 11
Sustainable Growth Elusive
For Most Firms
While average profit margins have remained resilient
through the cycle (varying between the mid-20s and
mid-30s), sustained growth has proven more elusive.
Few firms have been able to grow consistently over
the past decade. Underlying this fact is a shift in the
drivers of growth away from market appreciation
(which accounted for a third of growth since 2002)
and toward net new flows (which accounted for the
majority of growth). Furthermore, sustained growth
was about more than investment performance (which
explained about a third of growth); picking the right
spots for growth and focusing resources accordingly
was of equal or greater impact for individual firms.
Net new flows have been the strongest driver of growth
The market rebound in 2010 was reminiscent of the 1990s, when market
appreciation delivered the majority of AUM growth. However, over the past
cycle (2002-2010), net new flows have been the primary driver. In retail, for
example, net new flows accounted for 68 percent of growth, twice the con-
tribution of market appreciation (Exhibit 7, page 12). M&A, meanwhile, ac-
counted for less than 10 percent of AUM growth during the period.
Shareholders also appear to place a high value on net new flows, as evidenced
by their strong correlation with manager multiples (Exhibit 8, page 13). Given

14. Growth in a Time of Uncertainty 12
Exhibit 7
Net new flows account for more than two-thirds of growth in retail
asset management since 2002
Retail AUM indexed at 100 in 2002
181 15 -18 178
42
38
100
AUM end Net inflow Market AUM end Net inflow Market AUM end
of 2002 effect impact of 2007 effect impact of 2010
Source: Strategic Insight; McKinsey analysis
the importance of net new flows to growth and the consistency of profit mar-
gins, this is not surprising. What is surprising, however, is how few asset
managers achieve sustainable net new flows over a cycle and how much fac-
tors beyond investment performance matter.
One in five asset managers sustains above-average growth
While almost all asset managers can have good and bad years in terms
of net new flows, only about 20 percent have sustained above-average
net new flows and growth for a decade. For example, in the period prior
to the crisis (2002 to 2007) less than 50 percent of firms were able to
sustain growth that was above the five-year weighted CAGR of 14 per-
cent. From 2008 to 2010, one third of firms surpassed the weighted av-
erage AUM annual growth rate of 2 percent. In all, about 10 firms
sustained above-average growth over the decade, and only half of
those achieved this growth organically (Exhibit 9, page 14).

15. Growth in a Time of Uncertainty 13
Exhibit 8
Net flows are a key driver of earnings multiples in asset management
Price-earning ratio
12-month forward in 2011
Price/earnings
21.0 x
Correlation = 0.82
20.0 x
19.0 x
18.0 x
17.0 x
16.0 x
15.0 x
14.0 x
13.0 x
12.0 x
11.0 x
10.0 x
9.0 x
0 2 4 6 8 10
Average 2000-2010 net inflows on beginning-of-year AUM
Percent
Source: Strategic Insight; company financials; Standard & Poor’s; McKinsey analysis
Growth is about more than just investment performance
Investment performance clearly matters to overall growth, but explains just
over a third (correlation of 0.38) of net new flows over the past decade.
While none of the growth leaders had poor investment performance, none
had the best either. Rather, firms that delivered superior net flows com-
bined solid, sustained investment performance, business model advan-
tages (often aided by M&A or strategic shifts) and explicit resourcing
decisions about where and how to compete.
While individual firms have unique growth stories, certain business models
appear to have a growth advantage that is not tied to size. Over the past
decade, at-scale global specialist firms, retirement specialists and multi-
boutiques outperformed on growth, the latter often aided by M&A. Gener-
alist firms (both large and small) and focused niche players delivered
below-market levels of growth (but in the case of the latter, above-average

16. Growth in a Time of Uncertainty 14
Exhibit 9
One in five asset managers achieved above-average growth over the
past market cycle
Growth 2002-2007 versus 2008-2010 in AUM for leading U.S. asset managers1
Firms that
CAGR 2008-10 made
Percent CAGR = 14% acquisitions
of >25%
70 of assets
60 Firms that
50
made
divestitures
40 of >25%
of assets
30
Firms that
20 made no
10 significant
acquisitions
0 or divestitures
-10
CAGR = 2%
-20
-30
-70
-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 36 38 40 66 68 70
CAGR 2002-07
Percent
1
54 firms shown on chart, all within top 100 in both 2002 and 2010
2
CAGR calculated on all assets in Top 300 firms (excluding pension funds)
Source: Institutional Investor; McKinsey analysis
profits) over the cycle. Finally, independent asset managers have outper-
formed bank- and insurance-owned firms on growth, due to M&A and a
greater ability to recruit and compensate talent through the crisis. While
they do not ensure growth, certain models appear to enhance growth
prospects (Exhibit 10, page 15).
• At-scale global specialists (firms with AUM greater than $300 billion
in 2002 and more than 65 percent of AUM in one asset class such
as equities, fixed-income or alternatives) were able to grow before,
during and after the crisis, and as a result have captured significant
AUM share. These firms outpaced peers through a combination of
organic and inorganic growth over the decade. They tend to have
the most global focus and have been more profitable than other
models. Some firms have brought together specialist firms through
M&A to create a new category of global solutions provider (see
page 28 for more).

17. Growth in a Time of Uncertainty 15
Exhibit 10
Ability to capture growth opportunities driven by business model
Organic growth
Inorganic growth
CAGR of AUM Percentage
Percent point change
Percent in AUM share,
of firms,
2010 2002-10
2002-07 2008-09 2010
Global 28 12 6 2 +9
specialists1,2
Multi-boutiques 64 -7 24 3 +3
Retirement 17 1 15 2 +1
specialists
Focused,
13 -6 12 67 -3
niche players2
Sub-scale 17 -9 12 23 -4
generalists3
At-scale
13 -7 9 3 -6
generalists1
1
Firms that had more than $300 bn in AUM in 2002
2
Specialists and focused players had more than 65% of AUM in a single asset class (equities, fixed-income or alternatives) in 2002
3
Firms that are not specialists, at-scale, retirement or multi-boutiques
Source: Institutional Investor Top 300 asset managers; McKinsey analysis
• Multi-boutiques (firms owned as a multi-boutique holding structure) sig-
nificantly increased their share of AUM over the past decade, fueled in
large part by M&A and their ability to grow in emerging products and
regions ahead of competition. These firms also continued to deliver su-
perior profitability. The challenge for multi-boutiques is to deliver or-
ganic growth and manage the increasing complexity of their
governance model.
• Retirement specialists (firms focused on retirement, including record-
keeping platforms), like at-scale specialists, grew during all three peri-
ods of the last decade. These firms have clearly benefited from
consistency and scale of flows into the DC and IRA market, default tar-
get-date options (which benefited proprietary flow) and a steady focus
on a client need.
• Focused, niche players (firms with AUM less than $300 billion – typi-
cally $50 billion or less – and more than 65 percent of AUM in a single

18. Growth in a Time of Uncertainty 16
asset class) have shown less impressive growth than their larger peers,
but this is highly variable depending on an individual firm and its prod-
ucts. For example, specialists in international equity have boomed over
the last five years, while those offering traditional large-cap products
have fallen out of favor. Focused niche specialists are also more de-
pendent on investment performance than other players, as superior in-
vestment performance at the strategy level for a specialist boutique is a
clear driver of flows and, ultimately, profitability.
• At-scale generalists (firms with AUM greater than $300 billion but not fo-
cused on any particular asset class) rebounded in 2010 after underper-
forming their size peers earlier in the decade, but still lost 6 points of
AUM share over the last full cycle, more than any other model.
• Sub-scale generalists (firms with AUM less than $300 billion but no par-
ticular asset class focus) recovered somewhat in 2010, but have been
one of the slowest growing models, losing 4 percentage points in share
of AUM over the last market cycle.
Roughly 40 percent of the firms in the Since 2002, independent players
industry belong to this group, which
has relied almost entirely on organic
have significantly outgrown their
rather than inorganic growth. competitors through both
Finally, since 2002, independent players – organic and inorganic means,
regardless of business model – have sig- due to fewer capital constraints
nificantly outgrown their competitors
through both organic and inorganic
and a greater ability to attract
means, due to fewer capital constraints and retain talent.
and a greater ability to attract and retain
talent (they have 35 percent higher average compensation over the past
three years). As a result, independents’ share of the top 50 asset managers
has grown from 28 percent of AUM in 2002 to 54 percent in 2011.
Sustainable growth requires resolve and investment
Our report on the industry last year identified five major sources of market
growth: retirement solutions; international investing; sovereign wealth; ETFs
and passive investments; and alternatives. Over two-thirds of industry lead-
ers surveyed agreed that growth through 2015 would be highly concen-
trated in these areas. Surprisingly, this certainty was not reflected in firms’
strategic focus. Despite double-digit cost increases in 2010, most asset

19. Growth in a Time of Uncertainty 17
managers’ investments in growth were insufficient to tap the opportunities
(e.g., 2 to 3 points of the 12-percentage-point cost increases were slated for
growth). Moreover, most firms are still investing proportionately in their cur-
rent mix, rather than shifting resources toward growth opportunities.
To underscore the necessity for change and stimulate the right set of man-
agement discussions, in the next section we paint a picture of what the in-
dustry could look like in 2015.

20. Growth in a Time of Uncertainty 18
The Asset Management
Industry in 2015
Forecasting in volatile and uncertain markets can be
foolhardy given the complex nature of the forces that
impact change. But the past decade has shown that
management teams that made deliberate and
informed choices about where and how to compete
and invested behind those choices had a much
greater chance of sustained growth and profitability.
While senior management teams of asset managers
may disagree with the pace and magnitude of the
changes we expect for 2015, these projections
should provide the basis for debate and ultimately
conviction concerning where to invest and how to
prepare for alternative scenarios.
1. Retail alternatives go mainstream, accounting for one quarter
of retail revenues
Historically reserved for institutions and high-net-worth investors, alternatives
have experienced strong growth in the retail channel over the past five years
and now account for 8 percent of total U.S. retail fund assets. Over the next
four to five years, alternative products will go mainstream as retail investors,
confronted with volatile markets and the underfunding of their own retire-
ments, follow the path blazed by institutional investors. Asset classes are
also converging (again mimicking the institutional side), as investors integrate
alternatives with traditional asset classes (with products that incorporate

21. Growth in a Time of Uncertainty 19
leverage, hedging or volatility management). This “mainstreaming” of alterna-
tives should unlock the next wave of growth for retail asset managers, espe-
cially in the face of pricing pressure on traditional products and competition
from ETFs. We estimate that by 2015, retail alternatives will account for
roughly 13 percent of U.S. retail fund assets and 25 percent of corresponding
revenues (due to higher revenue yields) – up from 7 percent of AUM and 14
percent of revenues in 2010 (Exhibit 11).
Most asset managers – even those that agree with robust growth projections
for alternatives – have not yet made the shifts required to capture these op-
portunities. For example, changes in sales process (e.g., focusing on a few
advisors who can sell alternatives), incentives (away from gross flows to rev-
enues) and sales capabilities (e.g., positioning relative return and alternatives)
are just getting underway, opening the field for entrepreneurial firms that can
out focus and out execute incumbent players.
Exhibit 11
In 2015, retail alternatives will account for 13% of U.S. retail fund
assets and 25% of revenues
Year-end AUM, long-term Total revenue1, long-term Retail
’40 Act Funds ’40 Act Funds alternatives
Percent Percent Solutions
100% = $6.6T $9.4T $13.3T 100% = $53B $70B $106B
4 7 6 ETFs/passive
8 13 14
6
10 3 25
11 7 Active
11
15 5
8
16
6
85
78 73
68
59 60
2005 2010 2015F 2005 2010 2015F
1
Defined as expense ratio times average annual assets. Expense ratio includes management fees, distribution and marketing/12b-1 fees and
administrative and group operating fees; excludes commissions
Source: Strategic Insight; McKinsey estimates

22. Growth in a Time of Uncertainty 20
2. Retirement solutions deliver $2 billion in new revenues
Retirement and retirement-oriented solutions are already a major busi-
ness for many asset managers. Target-driven solutions (largely target-
date funds) have grown more than eight-fold in the past decade and, at
$545 billion, are now one of the largest single asset classes in the indus-
try. And retirement businesses (largely DC and IRA) have contributed 40
to 45 percent of net new flows over the past three years.
Two things will change fundamentally by 2015: First, the industry will
need better solutions to address what happens when investors reach
their “target date” (especially if the current low-rate environment per-
sists); and second, the industry must
orient its sales and marketing to target While virtually every asset
IRA rollovers, which at $400 billion of manager has a retirement offering
net flows in the next five years will be
of some kind, most are not
the largest net flow opportunity in
asset management. 2 poised to capture the
While virtually every asset manager opportunity. Many are solving last
has a retirement offering of some kind, decade’s problems.
most are not poised to capture the op-
portunity. Many are solving last decade’s problems (e.g., open architec-
ture target-date funds) rather than developing a suite of target-income,
target-return, target-inflation or target-risk solutions geared to those
who have passed their target date. Some have developed complex re-
tirement investment solutions but have underinvested in marketing them
to financial advisors and retail investors (where 70 to 80 percent of the
rollover money is flowing).
3. The second act begins for ETFs, with more than $1.6 trillion
in new assets up for grabs
ETFs have already made their mark on the asset management industry,
with assets growing by over 30 percent per year between 2000 and
2010 and now accounting for just under 10 percent of all U.S. mutual
fund assets and $1.5 trillion globally. 3 By 2015, we estimate that more
2 See “Capturing IRA Rollovers: The Net New Money Opportunity for Wealth Managers,” McKinsey & Company, July 2011.
3 See “The Second Act Begins for ETFs: A Disruptive Investment Vehicle Vies for Center Stage in Asset Management,” McKinsey &
Company, August 2011.

23. Growth in a Time of Uncertainty 21
than $1.6 trillion of new money will enter into ETFs with a global market
in excess of $3.1 trillion.
Much of this growth will come from passive ETFs and, given the impor-
tance of scale and liquidity, will benefit existing ETF leaders. However, con-
sidering the multiple advantages ETFs offer investors (e.g., cost,
tax-efficiency, lower cash drag, transparency and liquidity), all mutual fund
companies need to consider the magnitude of the threat to their existing
franchise. Beyond playing defense, there are also several opportunities for
growth, including active ETFs (still a nascent category, but one that we
project could reach $600 billion in AUM by 2015, especially in fixed-income
and money funds), ETF-based solutions and other new forms of ETFs.
Most asset managers (other than the existing leaders) have dabbled in
ETFs with little success, but we expect to see more leaders by 2015.
Exhibit 12
Asset management in emerging markets will set the pace for growth
and profitability
AUM size United Other developed Emerging
Pre-tax profits 2015 in 2015 States markets1 markets2
Basis points
60
50
Latin America
40
Middle East
30
Emerging Asia
20 Western Europe
Canada U.S. Africa
Eastern Europe
10
Australia
Japan
0
0 5 10 15 20 25
Forecasted CAGR AUM 2010-2015
Percent
1
Includes Western Europe, Japan, Canada and Australia
2
All other markets (i.e., not U.S. and not other developed markets)
Source: McKinsey Global Banking Profit Pool

24. Growth in a Time of Uncertainty 22
4. Emerging markets increase AUM share and surpass the U.S.
in overall profits
The U.S. and other developed markets’ share of global AUM will continue
to shrink as capital markets in emerging economies deepen, savings rates
continue to outpace those of developed countries, and U.S. investors in-
creasingly look to global products for higher returns and diversification. Mir-
roring the changes in underlying economic growth, asset management in
most emerging markets is expected to grow significantly faster and enjoy
higher profitability than in mature markets (Exhibit 12, page 21).
By 2015, emerging markets will increase their share of global AUM and,
for the first time, will account for the largest share of global profits (35
percent), surpassing the U.S. (31 percent) and other developed markets
(33 percent) (Exhibit 13).
Exhibit 13
The U.S. asset management industry's share of global AUM and
profits will continue to decrease as emerging markets grow
United States
Share of global AUM Share of global profit pool
Percent Percent Other
developed
100 100 Variation 100 100 Variation markets1
Emerging
markets2
31 -6
39 -4 37
43
33 -3
36
46 +0
46
+8
35
27
15 +4
11
2009 2015 2009 2015
1
Includes Western Europe, Japan, Canada and Australia
2
All other markets (i.e., not U.S. and not other developed markets)
Source: McKinsey Global Banking Profit Pool

25. Growth in a Time of Uncertainty 23
Few asset managers dispute the importance of emerging markets and
most will have a presence in the main asset classes (emerging market
products) or regions. However, few are investing in proportion to the size
of the opportunity (e.g., aiming for more than half of their growth to come
from emerging markets over the next five to 10 years) or developing differ-
entiated strategies by market (partnerships, joint ventures, acquisitions or
organic growth) to distribute or manufacture local products.
5. Retail sales productivity increases through a “sales alpha”
approach
In 2010, a typical investment firm spent 11 bps and 6 bps on its retail
and institutional sales and marketing efforts, respectively, but often had
an imperfect sense of the true return on that spending. Many institu-
tional sales forces monitor net new revenues but have only an intuitive
sense of how much of the increase is tied to product performance ver-
sus sales efforts. Most retail sales forces still cling to gross flows as a
primary measure despite the metric’s lack of correlation to revenues or
profits or to how financial advisors themselves are paid. This intuitive
sense of what drives flows might be expected to survive through 2015
were it not for the external pressures on pricing and revenue share and
major shifts in where product revenues
will be generated. The “sales alpha”
approach
By 2015, we expect that firms will bring can determine what
investment-like discipline to their sales percentage of flows and
and marketing efforts. A few years ago,
McKinsey developed a series of propri- revenues are truly generated
etary tools on the concept of sales by a sales team.
alpha, to determine what percentage of
flows and revenues are truly generated by a sales team for a given
product set with given performance, and given channels and territories.
As firms have implemented and refined the sales alpha approach to pri-
oritization and performance management, they have found that it has
significant implications for how they run their sales force, including
compensation, channel and territory coverage, resource allocation, and
redemption versus sales priorities. Whether through sales alpha or
other approaches, taking a sharper investment lens to sales and re-
structuring sales force operations to optimize returns should be a prior-
ity for sales leaders (especially in retail).

26. Growth in a Time of Uncertainty 24
6. Winning firms take decisive action to restructure rather than
reduce costs in mature businesses
Despite increases in assets and scale over the past decade, the produc-
tivity of asset managers has at best stagnated and, in categories like op-
erations and technology, deteriorated. Specifically, in 2002 the cost to
generate a dollar of revenue was 73 cents, a number that remained
largely unchanged in 2010. In addition,
as highlighted earlier, recent market Cost discipline and investments
gains and product shifts have masked
underlying issues on cost discipline, cost
in growth are complementary, not
variability and the profitability of certain competing, priorities for leading
lines of business. firms. Asset managers that strive
By 2015, we expect that at least twice to be growth leaders in 2015 will
as many asset managers will need to be-
come Decisive Operators than the 20
need to take a hard look at their
percent today that merit the title, partic- maturing lines of business to
ularly those firms that took minimal ac- determine where they can
tion to restructure during and after the
financial crisis. This will be necessary not
restructure rather than just
just to ensure that costs (especially tech- reduce costs to invest in new
nology and operations) are variable with areas of growth.
revenues amid market volatility, but also
to free up resources from mature businesses to invest in new ones. Cost
discipline and investments in growth are complementary, not competing,
priorities for the leading firms. Asset managers that strive to be Decisive
Operators and growth leaders in 2015 will need to take a hard look at
their maturing lines of business (e.g., traditional mutual funds, developed-
market footprints) to determine where they can restructure (e.g., cut by 30
percent) rather than just reduce (e.g., cut by 10 percent) costs to invest in
new areas of growth.
7. Independents dominate and new winning models emerge, but
M&A is muted
Over the past five years, independent asset managers have taken signifi-
cant share from their bank- and insurance-owned peers and now account
for over half of industry assets (up from less than a third in 2002). By 2015
we expect independents to increase their share to two-thirds of industry
AUM, due to three structural trends: First, we expect the more troubled

27. Growth in a Time of Uncertainty 25
banks and insurance companies to continue divesting asset management
businesses in a bid to raise capital to meet Solvency II and Basel III require-
ments (despite the higher ROEs these businesses command). Second,
bank compensation regulations and practices will make it increasingly diffi-
cult for these firms to compete for talent (as evidenced by existing pay
gaps). Finally, the growing differential between bank and insurer valuations
and asset manager valuations will make competing for accretive deals ever
more difficult for the former. While there will continue to be a role for bank-
and insurance-owned asset managers, it will be played by institutions who
can create value between asset manage-
ment and related businesses (e.g., retire- A new class of global multi-
ment solutions, private banking) as asset class solutions provider
opposed to those who see asset manage-
ment merely as a high ROE portfolio diver-
will emerge, either from mergers
sification play. of at-scale specialists or from
Beyond ownership structure, the winning generalists that successfully
growth models we described earlier (at- make the leap. To be among
scale specialists, retirement specialists,
multi-boutiques and niche firms) will con-
this select group, firms will need
tinue to thrive, with three important scale, a global orientation and
changes: an increasing focus on solutions
• A new class of global multi-asset class rather than just products.
solutions provider will emerge, either
from mergers of at-scale specialists or from generalists that successfully
make the leap. While many firms will aspire to this model, fewer than
five will make it by 2015. To be among this select group, firms will need
scale ($500 billion in AUM), a global orientation (at least 50 percent of
assets outside their home market) and an increasing focus on solutions
(e.g., more than 33 percent of revenues) rather than just products.
• At-scale generalist firms will either make the transition into global multi-
asset class solutions providers or risk falling into the ranks of “Stuck in
the Middle” generalist firms, with sub-par growth and profitability. To
avoid this fate, a firm’s ambitions must be proportional to its investment
and execution capabilities; firms that attempt to do too much with too
little, rather than make focused, realistic strategic choices, inevitably fal-
ter. Generalist firms (large and mid-sized) will have some of the biggest
strategic questions to address about their models and focus.

28. Growth in a Time of Uncertainty 26
• Multi-boutique firms have proven resilient in delivering growth and profits
over the past decade, but continued success will depend on their ability
to grow through small and mid-cap M&A, while managing the organiza-
tional complexity inherent in larger global operations.
Finally, while there will be opportunities for M&A over the next five years, we
expect that the pace will continue to be moderate, accounting for less than
10 percent of industry growth through 2015.

29. Growth in a Time of Uncertainty 27
Weathering 2012 and Winning
By 2015: Five Imperatives for
Management
We have drawn a partial portrait of the U.S. asset
management industry as it will look in four to five
years. Pulling back to the present, it is clear that
the period leading up to 2015 will be decisive for
most asset managers. Firms with business model
advantages – and those that restructured their
operating model during the crisis – will have the
wind at their back in their efforts to claim or
extend industry-leader status. Their less-
advantaged peers must make strategic decisions
today about how they will compete.
As they prepare for the uncertainties and opportunities the next few years
will present, management teams should consider the five imperatives listed
below and forcefully debate the related questions. The answers will vary by
firm, but making definitive choices will be crucial to success in 2015.
1. Ensure profitability can withstand continued pricing and cost
pressure and volatility
• What steps should we take in 2012 beyond standard cost reduction
(e.g., 10 percent reductions, hiring freezes) to address the industry’s
structural profitability issues? How do we prepare for another major
market decline? Continued price erosion?

30. Growth in a Time of Uncertainty 28
• Have we improved our true productivity (especially in fast growth areas like ops
and IT) and taken steps to ensure annual productivity gains?
• Do we capture the benefits of scale or “spend them” on complexity? How
can we reduce duplication, complexity and waste (especially outside the in-
vestment platform)?
2. Develop conviction about the growth opportunities that will ac-
count for a third of new profits by 2015
• Does a point of growth matter more (in terms of our overall multiple or valua-
tion) than a point of margin? What are we optimizing to?
• What is our view of the growth landscape for 2015? Which of McKinsey’s seven
predictions do we agree or disagree with? Why? What are we doing about it?
• Which two or three mega-growth areas will drive more than half of our
growth (and a third of profits) over the next three to four years, and how will
this change the business mix?
• How much of our budget (and leadership) is dedicated to growth in general
and in particular to the mega-growth areas? Is this number proportionate to
the opportunity and our firm’s ambition?
• What initiatives will we cut to create financial capacity and leadership band-
width to fuel our targeted growth ambitions?
3. Shift investment emphasis toward solutions and outcomes
• What outcomes will be most important to our clients in 2015 (e.g., LDI, inflation
solutions, target-income solutions, target risk) and where should we be leaders?
If we are leaders, how big a business do we think solutions will be in 2015?
• How do we transition from a product-driven firm to a client- and solutions-dri-
ven firm? For example, is our investment platform organized and incented to
deliver client outcomes (e.g., income) or product-focused investment alpha?
4. Bring investment-like discipline to sales and marketing
• Does our return on investment from sales and marketing account for rev-
enues, asset persistency and true cost to originate sales? How can we im-
prove returns, which have been roughly stagnant for the past decade?
• How much “sales alpha” does our sales force deliver compared to what it
should be delivering? Is our sales force focused on the largest opportunities
for “sales alpha”?

31. Growth in a Time of Uncertainty 29
• How can we tie our sales incentives more closely to our firm’s economics
and true sales value-add? By 2015, what portion of retail sales incentives
should be tied to gross sales?
5. Make decisions about a winning 2015 business model
• Which of the winning growth models for 2015 will we emulate? How do
we avoid falling short of becoming a global multi-asset class firm and get-
ting stuck in the middle?
• For generalist firms, how do we avoid spreading ourselves too thin, playing in
too many products, clients segments and geographies but winning in none?
• Is our ownership structure optimal? Are we deriving enough value from our
financial institution parent (e.g., distribution, protection products)? What are
the risks (e.g., compensation) from parent company regulation?
***
The surface resilience of the U.S. asset management industry in 2010 masks
continuing core challenges in costs, productivity and growth. In fact, a look
back over the market cycle to 2002 reveals that few firms, even among the
industry leaders, have been able to grow consistently. This research also
shows that strategic decisions about where and how to compete are just as
important as investment performance when it comes to winning in asset
management. These insights are especially important today, as the industry
is on the cusp of changes that will lead to a markedly different environment in
just a few years. To be among the leaders in 2015, individual firms must
make explicit choices on how to take advantage of a narrow set of large
growth opportunities and invest decisively behind them.
Pooneh Baghai
Geraldine Buckingham
Kurt MacAlpine
Salim Ramji
Nancy Szmolyan
The authors would like to acknowledge the contributions of Jeremy Borot,
Céline Dufétel, Onur Erzan, Matthieu Grosclaude, Ogden Hammond, Owen
Jones, Ju-Hon Kwek and Raksha Pant to this report.

32. 30
About McKinsey & Company
McKinsey & Company is a management consulting firm that helps many of
the world’s leading corporations and organizations address their strategic
challenges, from reorganizing for long-term growth to improving business
performance and maximizing profitability. For more than 80 years, the firm’s
primary objective has been to serve as an organization’s most trusted exter-
nal advisor on critical issues facing senior management. With consultants in
more than 40 countries around the globe, McKinsey advises clients on strate-
gic, operational, organizational and technological issues.
McKinsey’s Wealth Management, Asset Management & Retirement Practice
serves asset managers, wealth management companies and retirement play-
ers globally on issues of strategy, organization, operations and business per-
formance. Our partners and consultants in the Americas have deep expertise
in all facets of asset management. Our proprietary research spans all institu-
tional and retail segments, asset classes (e.g., alternatives) and products
(e.g., ETFs, outcome-oriented funds). Our proprietary tools provide deep in-
sights into the flows, assets and economics of each of the sub-segments of
these markets and into the preferences and behaviors of consumers, in-
vestors and intermediaries.
To learn more about McKinsey & Company’s specialized expertise and capa-
bilities related to the asset management industry, or for additional information
about this report, please contact:
Pooneh Baghai Kweilin Ellingrud
Director Principal
(416) 313-3939 (612) 371-3132
pooneh_baghai@mckinsey.com kweilin_ellingrud@mckinsey.com
Salim Ramji Onur Erzan
Director Principal
(212) 446-7393 (212) 446-7172
salim_ramji@mckinsey.com onur_erzan@mckinsey.com
Céline Dufétel Nancy Szmolyan
Principal Senior Knowledge Expert
(212) 446-8081 (212) 446-7793
celine_dufetel@mckinsey.com nancy_szmolyan@mckinsey.com

33. 31
Further insights
McKinsey’s Wealth Management, Asset Management & Retirement Practice
publishes frequently on issues of interest to industry executives. Among our
recent reports:
The Second Act Begins for ETFs: A Disruptive Investment Vehicle Vies for
Center Stage in Asset Management
August 2011
Capturing IRA Rollovers: The Net New Money Opportunity for Wealth Managers
July 2011
The Asset Management Industry: Now It’s About Picking Your Spots
September 2010
Winning in the Defined Contribution Market: New Realities Reshape the
Competitive Landscape
September 2010
Restoring Americans’ Retirement Security: A Shared Responsibility
October 2009
About McKinsey’s annual asset management benchmarking study
This report is based in part on McKinsey’s 10th annual benchmarking survey of
U.S. asset managers. McKinsey has worked with Institutional Investor’s U.S. In-
stitute since 2001 to benchmark the financial performance of the U.S. asset
management industry. In 2010, more than 100 firms with over $12 trillion in AUM
– representing over 60 percent of the U.S. asset management industry – partici-
pated in the benchmarking survey, which encompasses over 2,000 business per-
formance metrics. This survey is a core component of McKinsey’s global
benchmarking of over 300 asset management firms from North America, Europe,
Asia, South America and the Middle East, with roughly $23 trillion in AUM
(around 60 percent of the global industry).
Financial Services Practice
November 2011
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