Asset and wealth unit economics: fee rates, mix, and the AUM bridge
Calculate revenue from a product mix, the cost of a shift to passive, and the contribution of a private banker.
Industry brief, with a one-minute summary: Asset and wealth managementKey takeaways
- Revenue is AUM times the fee rate for each product, added up. A shift in mix from expensive to cheap products can cut revenue even while AUM grows.
- Revenue equals AUM times the fee rate. If AUM rose and revenue fell, the average fee rate must have fallen, usually because of mix or fee cuts.
- Worked case: Fee compression at a European asset manager.
Key idea
Revenue is AUM times the fee rate for each product, added up. A shift in mix from expensive to cheap products can cut revenue even while AUM grows.
Worked case
Fee compression at a European asset manager
The prompt
A European asset manager has EUR 100 billion of AUM: EUR 60 billion in active equity funds at a fee of 0.60 percent a year and EUR 40 billion in passive funds at 0.10 percent. Costs are EUR 260 million a year. Next year, EUR 6 billion moves from its active funds to its passive funds, and separately markets add EUR 8 billion and net flows add EUR 3 billion to AUM. What are revenue, the average fee, and the margin today, and how much revenue does the mix shift cost?
The structure
- Revenue = sum of AUM x fee rate by product
- Active: AUM x 0.60 percent
- Passive: AUM x 0.10 percent
- AUM bridge: start + net flows + market moves = end
Working it through
1. Active revenue
EUR 60,000 million at 0.60 percent.
Active revenue (EUR millions):60,000 × 0.006 = 3602. Passive revenue
EUR 40,000 million at 0.10 percent.
Passive revenue (EUR millions):40,000 × 0.001 = 403. Average fee
Total revenue of 400 divided by AUM of 100,000, in basis points.
Average fee (basis points):(360 + 40) ÷ 100,000 × 10,000 = 404. Operating margin
Revenue 400 minus costs 260, divided by revenue.
Operating margin (percent):(400 - 260) ÷ 400 × 100 = 355. Cost of the mix shift
EUR 6,000 million now earns 0.10 percent instead of 0.60 percent.
Revenue lost from the shift (EUR millions):6,000 × (0.006 - 0.001) = 306. AUM bridge
Start 100 plus net flows 3 plus markets 8. The shift between products does not change the total.
AUM at year end (EUR billions):100 + 3 + 8 = 111
The recommendation
The manager should grow where fees hold and cut the cost of its passive range, because the shift to passive alone removes EUR 30 million of revenue, 7.5 percent, even as AUM grows to EUR 111 billion. First, today revenue is EUR 400 million at an average fee of 40 basis points, with a 35 percent margin. Second, each euro that moves from active at 0.60 percent to passive at 0.10 percent loses five sixths of its fee. The risk is that markets fall and the EUR 8 billion market gain reverses. As a next step, track fees and flows by product every quarter.
Risks: Markets can fall as well as rise, so the EUR 8 billion market gain may reverse; Cutting active fees to keep clients lowers revenue further.
An Indian mutual fund company starts the year with AUM of INR 5 lakh crore. Net inflows are INR 40,000 crore, and markets raise the value of the starting assets by 10 percent (ignore market moves on the new money). What is the AUM at year end, in INR lakh crore? (1 lakh crore is 100,000 crore.)
A relationship manager at a private bank in Singapore looks after USD 400 million of client assets. The bank earns a revenue margin of 0.80 percent a year on these assets. The RM and their support team cost USD 1.2 million a year. What is the contribution of this RM, in USD millions a year?
A manager's AUM grew 8 percent, but revenue fell 2 percent. What is the most likely reason?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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