Fund managers join investment banks in hurt locker

Asset management firms are starting to share in their sellside counterparts' pain. The funds industry could face additional costs of up to $7 billion - or 3 percent - a year, new research by consultancy Oliver Wyman and lender Morgan Stanley estimates. The new regulatory framework engendered by the 2008 financial crisis was always intended to shift risk from banks to asset gatherers. Now it looks to be doing so. The steady pullback by banks from markets is the main culprit. Banks are trading for their own profit and financing trades for others far less than five years ago: risk-weighted assets have fallen by more than a quarter across the industry since 2010, the study claims. The consequence for fund managers is that it can take longer to trade big orders. This pushes up costs. Misconduct fines, so familiar to bank bosses, could also soon be a bugbear for fund houses. Oliver Wyman and Morgan Stanley say that the market underestimates their potential impact. One particular area of concern is the failure of synthetic tracker funds to deliver returns that match their relevant benchmark. A survey cited by the research shows almost three-quarters of the UK asset management industry lacks the systems to analyse such performance adequately. More from Breakingviews : A steady Fed would hike rates another notch Some asset managers can partially dispel these storm clouds. Scale should help, both to spread higher compliance costs and leave enough for investment in risk management systems. So-called gates that limit redemptions, standard at most hedge funds, offer a similar risk buffer. Negative interest rates pose a tougher conundrum, though. The European Central Bank's new negative 0.4 percent deposit rate makes it costlier to park cash during the day or overnight, as many fund managers must. More exchange-traded funds could be one answer: managers can charge fees for their promise of cash-like liquidity. The snag is that ETFs can also introduce greater risk, since some include a degree of abstraction from the underlying assets. The good news is asset managers are spared some onerous forms of regulation because they don't seem to carry the systemic threat that investment banks appear to. The latter face a bill of up to 8 percent of their costs. But fund management is still set to get more difficult. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

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Asset management firms are starting to share in their sellside counterparts' pain. The funds industry could face additional costs of up to $7 billion - or 3 percent - a year, new research by consultancy Oliver Wyman and lender Morgan Stanley estimates. The new regulatory framework engendered by the 2008 financial crisis was always intended to shift risk from banks to asset gatherers. Now it looks to be doing so.