Money-management growth = more choices for investor

The pace of economic growth may have slowed since the financial crisis, but the creation of wealth has picked up, thanks to strong financial markets—recent volatility notwithstanding. It's still providing a nice tailwind for the global money-management industry despite the seeming roller-coaster ride of late.

"The troubles of the financial crisis are behind us, and consumer attitudes are much better now," said John Siciliano, a partner with accounting and professional services firm PricewaterhouseCoopers. "We're in a period of consistent growth for the [money]-management industry."

PWC projects that global assets under management will grow from about $64 trillion at the end of 2012 to $101 trillion by 2020. Much of that increase will come from the fastest-growing regions of the world—namely Asia, South America, the Middle East and Africa—but investable assets in North America are expected to increase by an average of 5.1 percent annually, to just under $50 trillion, by 2020.

For individual investors, growth in the industry means more choice and lower prices. The opportunities to create a low-cost investment portfolio diversified across geographic markets and asset classes have never been greater for U.S. investors.

Investments formerly available only to institutional investors—such as commodities, real estate, international equities and fixed income, and even hedge fund investing strategies—are now accessible in publicly traded funds either directly by retail investors or through financial advisors.

"The biggest change since 2008–2009 is the breadth of product available to individual investors across asset classes," said John Mangano, a senior analyst covering fixed income at consulting firm Aite Group.

Much of that access is coming through low-cost index funds and exchange-traded funds that cover an ever-widening range of markets and investments and charge far lower fees than actively managed mutual funds. Assets in ETFs recently topped $2 trillion—roughly the same amount of assets managed by the hedge fund industry.

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The vast array of investment products, however, can be a major challenge for the average investor to understand, let alone construct a well-balanced portfolio.

"The range of choice [in investment products] at Vanguard alone is huge," said Martha King, managing director of the Institutional Investor Group at Vanguard. With more than $3 trillion in assets under management now, Vanguard is the biggest money manager in the country.

"We're mindful that all that choice can be confusing, even paralyzing," King said. "One reason more people feel they need help with investing is that there's so much choice in the market."

The good news for individual investors is that financial advice has become increasingly affordable and accessible by people with even modest amounts of assets.

The digital platforms commonly referred to as robo-advisors construct investment portfolios for investors based on their answers to a series of questions about their finances and investing objectives.

More recently, industry heavyweights Vanguard and Charles Schwab have also come to market with low-cost advice models managed largely on digital platforms that use low-cost ETFs and index funds to keep costs down.

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Other money managers are also constructing products that incorporate asset-allocation strategies and are designed to address an individual's overall financial objectives.

"We see a lot more baby boomers wanting help with investing as they approach retirement," said Derek Young, president of Global Asset Allocation at Fidelity Investments, one of the biggest active money managers in the industry. "We've seen a big push toward managed accounts that consider an individual's entire financial situation and provide a customized solution."

That desire for customization has also translated to 401(k) retirement plans that increasingly have auto-enrollment features for employees and target-date funds that provide a simple asset-allocation model for individuals based on their age and risk tolerance.

As investors age, the portfolio will progressively tilt more toward conservative fixed-income investments.

"Some people have unique demands, but the trend we see is that one size fits most," said Young, whose firm performs record-keeping for about 20 percent of 401(k) assets in the country. "Target-date funds and managed accounts are accounting for the bulk of the growth in the industry now."

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How individual investors get their financial advice is likely to have a major impact on their demand for investment products going forward.

Registered investment advisors, for example, have become enthusiastic users of ETFs in constructing diversified portfolios for their clients. As the fastest-growing distribution channel in the advisory industry, RIAs have helped fuel growth at the major ETF managers Vanguard, BlackRock and State Street Advisors.

In contrast, higher-cost, actively managed mutual funds sold through the large Wall Street wire houses and independent brokers have experienced much less growth.

Aite Group's Mangano said the growth of ETFs, which predominantly follow market indexes and low-cost index mutual funds presents a major challenge to actively managed funds and to the asset managers that offer them.

"Investors are now shopping on fees," he said. "They're asking themselves why they are paying 80 to 100 basis points for active management when it's not performing.

"The genie is out of the bottle, and there's no putting it back," he added.

Companies offering actively managed funds might take some heart in the increased volatility in investment markets so far this year. While active strategies have significantly underperformed passive investing during the run-up in markets since the financial crisis, active management may come back into favor as the markets get rough.

"It's cyclical," said Fidelity's Young. His firm has passive investment funds, but it continues to offer the widest range of actively managed funds in the industry. "Active managers have been outperforming passive strategies in the year-to-date, and we think there is a great opportunity for them to deliver value as interest rates rise and we get into a more normal market regime."

Stuart Parker, president of Prudential Investments, also thinks that the better performance of active strategies this year may reverse some of the asset flows into passive funds.

"This isn't the first time this has happened," he said. "Investors follow performance."

Parker acknowledges that investors are now more focused on product costs but he nevertheless intends to stay focused on the actively managed funds that Prudential sells through a variety of distribution channels.

"We identify equities, fixed-income products and real estate investments that outperform, and we're going to stay with what we do well," Parker said.

Whether investment products are managed actively or passively, the demand for them will continue to grow in the future, experts say.

—By Andrew Osterland, special to CNBC.com