JPES’ annual asset owner research, published in December, sounds a note of caution over an investment management industry trend that has been gathering pace and looks set to affect the wider investment sector, including asset owners themselves, in light of the latest government intervention.

Consolidation, forced on the investment industry by increased costs related to regulation at one end and squeezed margins as clients seek better value for money at the other, is regarded as either negative or very negative by almost 80% of respondents, asset owners across DB and DC pensions schemes as well as insurers, charities, wealth managers and platforms.

And yet a similar fate is likely to beset these asset owners as the government moves forward with plans to consolidate the pensions industry, with further detail to be announced in the Pensions Schemes Bill next year.

Furthermore, consolidation is already rife in the wealth management space with over twenty mergers and acquisitions announced in the first five months of 2024 according to WealthBriefing, while research by Investec Wealth & Investment reports an increasing trend of deals is expected in the IFA and wealth management sectors over the next five years.

A core part of asset owners’ concern over potential consolidation is what this means for underlying clients and whether it will be beneficial. A recent article in the FT on the consolidation in private credit specifically asserts that consolidation in this case implies a top of the market moment and potentially reduces choice for investors as managers move to offer either low-cost ETFs or private credit exposure, leaving traditional fixed income mutual funds on the shelf.

And yet for investment managers, the pressures of increasing regulation and compliance, including ESG reporting and the growing importance of technology and investment in AI means the cost of not scaling up and delivering in these areas for clients could be punishing.

At the same time, pressure remains on investment managers to ensure they differentiate themselves and their products, particularly if the number of clients is reduced by consolidation as well.

As identified in our research, this trend creates potential advantages for boutique managers, able to demonstrate the benefits of a specialist focus and independent structure. These organisations need powerful propositions if they are to outgun the larger competition and will need to be able to withstand the wider pressures outlined above forcing their competitors into partnerships.

As such, we have defined culture as a key component of asset owners’ decision-making when selecting investment managers, and it is here, in particular, where boutiques may have the edge. Our research tells us that this is an area where investment managers of all sizes need to do better to convey their distinct offerings and culture.

It seems the combined pressures and resulting costs facing the investment industry will likely result in further consolidation and compromise choice as investment managers chase a smaller pool of clients and bifurcate between low-cost products and more specialist assets. As this happens it becomes increasingly important for managers to effectively communicate their strategies with their clients.

Looking forward, it is tempting to ask where this wave of consolidation will end. And yet, there have been plenty of noises coming from the EU and the UK in recent months about a shift in focus, from over-regulation to growth, particularly now in the face of increasing pressures from the US with a Trump administration. This could mean the number of asset managers and wealth managers continues to dwindle, or might it actually signal a more benign environment will follow to foster new entrants.