Peter Toogood, CIO at The Adviser Centre, has said asset managers are about to face huge changes very quickly, but warned many firms are not equipped to respond effectively to the evolving landscape.
As groups feel the ongoing pressures of increasing costs, more onerous regulations and the rise of passives, asset managers will be forced to develop more innovative products to meet client demand for outcome-focused solutions, he said.
Toogood also urged firms to stop comparing themselves and trying to beat the benchmark, but instead focus on alternative outcomes, such as products that deliver genuine alpha or absolute returns.
"Not many teams are equipped for this process and it implies lots of parts of the food chain are overpaid," Toogood said.
"Fund management groups know the writing is on the wall. They should change their models, lower their costs and deliver different products."
Toogood's comments come after analysts at AB Bernstein warned fund groups' focus on chasing assets under management instead of profitability would lead to the "cannibalisation" of the industry.
Meanwhile, in response to the Financial Conduct Authority's (FCA) Asset Management Market Study, Gill Hutchison, research director at The Adviser Centre, said she was "hugely disappointed" by the regulator's final analysis on fund ratings agencies.
The FCA found "that over our assessment period, ratings and best buy lists did not on average identify funds that outperformed their Morningstar category benchmarks."
However, Hutchison said the FCA forgot to mention in its analysis that it is not all about performance against a benchmark but also about risk-adjusted returns.
"You could be a conservative manager who underperforms the UK market but that does not decide whether it is a good or bad outcome," she said. "This did not feature in their final report and I was hugely disappointed by that.
"All it did was reinforce what the industry has been like for years and years, which is dominated by first quartile performance.
"This is the bad old days of fund management as it does not explain why an investor should hold the fund; what happens when that fund is no longer first quartile?"
Turning to the investment landscape, Toogood warned there were few attractive opportunities in the current climate, as stocks are expensive while bonds are low yielding.
He said the biggest market issue would come when central banks began to withdraw money, but added while liquidity was still "flushing through the system", markets would continue to grind upwards.
"When central banks withdraw money, who knows what will happen," he said. "In 2008, central banks had interest rates to cut and money to print but in 2017 there is nothing left. Central bankers and world governments are still fighting last decade's war.
"This is why it is a struggle [to invest] as we do not know what happens. Investors should be very careful about what they do.
"Fund managers have low relative opportunities and no absolute opportunities. Both value and growth managers are finding it hard to find anything at this point."
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected