Mutual Funds 2030: PwC

Through the pandemic, geopolitical conflicts, inflation spirals and the market pressures of the last three years, the mutual fund industry has experienced a period of societal self-reflection, with the pandemic being a stimulus for the industry to take stock, reflect and take action.

This unprecedented period of change for the mutual fund industry has fundamentally challenged it and has changed the industry’s principal stakeholders’ behaviors and expectations.

In particular, rising expectations from investors, employees, regulators and society as a whole are reshaping the future of the mutual fund industry as we look toward 2030.

Changing stakeholder expectations create both challenges and opportunities for mutual fund managers. Firms will need to adapt to these pressures while facing competition, declining fees and consolidation. Successful organizations can revolutionize their businesses through these key pillars.

Strategic positioning: Mutual fund managers should focus on core competencies as industry trends will drive M&A, outsourcing and changing product lineups.
Technology transformation: Advances in technology will continue to have a significant impact on the mutual fund industry, notably with products, advice and distribution.
Workforce: Firms should change how they retain and attract talented employees. They’ll need to offer flexible work arrangements, competitive pay, fulfilling work assignments and multiple career paths.
Product innovation: Mutual fund managers should do more to tailor investment products to changing investor expectations, particularly for investors who are willing to take more risks, are socially conscious and prefer a tech-enabled experience.

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2030 outlook: Slower growth, consolidation and downward fee pressure continues

Fee pressures remain constant for the US mutual fund industry. Fees have continued their multi-year decline as investors demand more for less.

This has accelerated the move to passive products. We estimate that passive funds may rise from 44% to 58% of total US mutual fund/ ETF industry assets by 2030 (see Figure 2), as investors will likely have more choices of low-cost mutual funds and ETFs.

The continuing shift to cheaper passive funds will also inherently result in lower revenue for asset managers. By 2030, we estimate that the blended expense ratios for active and passive funds may be 19% lower than they were in 2022. This continued downward fee pressure will likely force managers to find operational efficiencies and cost reductions to maintain profitability and competitiveness. In response, investments in automation and outsourcing non-core functions are two likely ways firms will attempt to cut costs.

We expect that up to 20% of today’s mutual fund firms could be acquired or disappear by 2030. Mega managers — the top five US mutual fund managers — will accumulate most of the growth between now and 2030, accounting for 65% of mutual fund AUM by 2030, up from 55% in 2022. Factors contributing to the continued growth of these mega managers include their ability to offer a broader range of products, including index funds, ETFs and bond funds. Many smaller mutual fund firms aren’t able to do this, which limits their ability to grow.

Prediction 1: Passive funds will account for 58% of total US mutual fund industry AUM by 2025, up from 44% in 2022.

Prediction 2: We expect that up to 20% of today’s mutual fund firms will be acquired or eliminated by 2030.

Prediction 3: Combined active and passive fund expense ratios will decline by 19% by 2030.

Prediction 4: Mega managers will account for 65% of US mutual fund AUM by 2030, up from 55% in 2020.

Prediction 5: Assets under management (AUM) growth in US mutual funds will grow to 6% (CAGR) between 2022 and 2030, reaching $38 trillion, slowing from 7.4% between 2010 and 2022.

Investors’ rising expectations

Investors increasingly demand more product innovation, transparency, personalization, a higher-quality tech-enabled customer experience and alignment with their values. They expect more for less, new products, and access to other asset classes.

The firms that create cost-effective, innovative products, offer an effective digital customer experience and prioritize transparency and customization can attract and retain investors.

Overall AUM growth averaged 2.5% between 2019 and 2022, with the pandemic slowing growth from 2020. We forecast AUM growth will reach 6% between 2022 and 2030 as the industry recovers from the pandemic and related economic market downturn (see Figure 3), and we anticipate investor demand for new products to be a significant part of the growth. In line with the increase in ETFs and passive products, we also anticipate growth in active ETFs, liquid alternatives and socially conscious products. However, we expect that there will be competing pressures from investment products that focus on real assets, private equity and private debt in terms of flows from investors looking at ways to increase alpha.

US population demographics will have a significant impact on investment products between now and 2030. According to a 2022 FINRA survey,⁴ there are significant differences in investor preferences between investors aged 18-34 and those 55 and older (see Figure 4). Younger investors are more likely to hold crypto investments, focus on socially conscious investments, take significant investment risks, use apps for trading and conduct research on social media.

In other words, firms now face a new breed of investor, one who expects more than simply a return, wants to be bold and wants to invest in products that have meaning. Accordingly, the mutual fund industry will need to modify its product offerings to meet these demands while complying with regulations and seizing investment opportunities. Firms also will need to look for innovative ways to attract and retain investors, through apps, social media, new distribution channels, model portfolios and digital platforms.

We expect demand for low-cost investment products such as index funds and ETFs to continue, and we’re also expecting significant growth in active ETFs that are lower cost and more tax efficient than comparable mutual funds. Mutual fund managers will likely face competition from separately managed accounts, collective investment trusts and direct indexing products, which typically can be offered at lower costs and personalized to investor goals and risk appetite. PwC’s Assets and Wealth Management Revolutions 2023 predicts that direct indexing AUM will more than triple by 2027.

To keep up with changing expectations for innovative products and customer experiences, mutual fund managers have been investing in digital assets through direct holdings, investments in funds or equity investments in digital asset companies.

_{⁴“Investors in the United States: The Changing Landscape”, FINRA, December 2022, Accessed June 14, 2023}

Rising expectations of employees: The pendulum swings

Ongoing changes to the employee-employer dynamic

Many of the working practices that evolved during the pandemic have resulted in fundamental and permanent changes in the employer-employee relationship. Societal self-reflection, changing culture and the lack of connectivity put loyalty to the test. During the pandemic we saw record breaking levels of voluntary turnover, up 35% between 2020 and 2021.⁵ In response, because workers who have a sense of purpose generally are highly motivated and more productive, it’s essential that mutual fund managers focus on core values and purpose to attract and retain a workforce with different expectations from previous generations. Put succinctly, employees increasingly want to feel that their work means something and that employers value their contributions.

Because remote work was successful at many firms, many employees have greater expectations for hybrid working arrangements that combine both in-office and remote work. Additionally, the focus on work-life balance during the pandemic has resulted in a strong focus on health and well-being. Offering flexible hours, fitness programs, mental health programs and other initiatives are key differentiators in attracting and retaining talent.

The pandemic also highlighted the need for continuous learning. Some of the key ways firms can help develop employees include:

Creating career development and upskilling opportunities.
Prioritizing personal and professional growth.
Nurturing employee interest in artificial intelligence.

That said, in the ongoing struggle for talent, market volatility has slowly shifted the employee/employer power dynamic. The labor market in the US mutual fund industry favored employees from 2020 to 2022 but has since moved back to employers, who have slowed hiring, grown pessimistic about the economy and are engaging in layoffs and compensation cuts. Still, it’s important that employers not simply react to the short-term market trends. It will be important to invest in the future by creating an environment that attracts and retains top talent that has expectations for employer flexibility.

Half of employees in PwC’s 2023 Trust Survey said companies should take a public stance on social issues if they’re related to the core business.

_{⁵PwC’s Saratoga Benchmarking 2022 Results}

Diversity, equity and inclusion: Helps to differentiate firms in competitive market for talent and customers

Diversity, equity and inclusion (DEI) came into focus over the last few years as companies prioritized building a diverse workforce and creating an equitable and inclusive work environment. The focus on DEI has since become a permanent fixture for many companies as it helps them differentiate in a competitive market for talent and customers. To stay competitive, it’s important that companies have a strong DEI record while acknowledging there is a range of viewpoints on DEI.

Tech-enabled experience: Upskilling and technology transformation leads to better hiring and retention of highly skilled employees

To stay competitive in the ongoing struggle for talent, AWM firms invested in automation, upskilling and advanced technologies during the pandemic given all the changes occurring at that time. Firms have continued to invest in each of these areas as job growth in the next five years is expected in data analytics, artificial intelligence, encryption and cybersecurity functions.¹⁰ In particular, artificial intelligence and machine learning, business intelligence analysts and information security are expected to be some of the fastest-growing jobs relative to their size today. It will be important for firms to continue investing in their technology transformation to remain competitive, particularly when hiring and retaining highly skilled employees.

_{¹⁰World Economic Forum, "Future of Jobs Report 2023," accessed June 6, 2023}

Rising expectations of regulators: Increased enforcement and rulemaking

The Securities and Exchange Commission (SEC) has a three-part mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. Over the years we’ve seen significant changes in investment products, investor demographics and technology. The SEC rules and regulations have continued to adapt, including new concentration on disclosures, fee transparency, cybersecurity, data protection and compliance and risk management.

Just as the mutual fund industry is adapting to technological advances, the SEC is responding with a number of fast-paced policy initiatives, including proposed rules around cybersecurity and oversight of outsourced services, including model portfolios, index providers, investment compliance, portfolio accounting, pricing and valuation services.

Regulators have noted that the demographics of investors are changing — shifting from experienced investors who often prioritize capital preservation and income generation to younger investors who are willing to take more risks, invest in socially conscious funds and prefer to use online platforms and apps to manage their portfolios. We anticipate an increased regulatory focus on the newer ways of investing and newer investment products, including those involving digital assets.

The SEC is keenly aware of the rapid pace of change and has responded by beefing up enforcement to drive compliance, recently issuing record penalties and fines in its fiscal 2022 examinations.¹¹ The SEC 2024 Examination priorities include information security, operational resiliency, crypto assets, emerging financial technology and anti-money laundering.

The increased regulatory focus is keeping mutual funds and investment advisers busy responding to data requests related to more frequent and timely reporting requirements. Asset managers should balance investments in technology transformation with respect to products, operations and distribution with the increasing data and reporting requirements related to cybersecurity risks and protecting client data and assets.

_{¹¹SEC Announces Enforcement Results for FY22,” November 15, 2022, accessed June 20, 2023}

A focus on purpose

Climate change, social justice movements, the COVID-19 pandemic and many other events have resulted in society expecting more from the mutual fund manager, not just a return on investments. Society expects businesses to play their part in societal change and the mutual fund industry is not immune to such expectations.

To meet society’s expectations, we believe fund managers will be asked to:

Make a difference and create sustainable outcomes to drive value and growth while strengthening the environment and society as a whole.
Engage in community programs, educational courses, environmental initiatives and other charitable activities, including monetary donations and employee volunteers.
Differentiate by redefining the firm’s DEI relationship with its employees, boards and society at large.
Align with their clients’ and other key stakeholders’ views on sustainability.

Trust

Companies are working harder than ever to earn trust among their core constituents. This includes mutual fund managers, who are navigating challenging financial markets, significant competition for investors and increased regulations. After all, a lack of trust can erode brand value, hurt financial performance and limit a firm’s ability to attract and retain talent. And building trust can boost profitability. Just look at the results of PwC’s 2023 Trust Survey, where 91% of business executives agreed that their ability to earn and maintain trust improves the bottom line.¹²

Because it can create value and improve the bottom lines, mutual fund managers should embed trust into their corporate strategy and all of their business processes to drive better outcomes. Building trust is a competitive differentiator, which is useful when attracting both investors and talent. In particular, fund management should embed trust into its corporate strategy and all of its business processes to drive better outcomes. Boards of directors at mutual funds should also incorporate questions about trust into board and committee discussions in such areas as strategy, marketing, and risk management.

_{¹²PwC Trust Survey, March 2023}

Mutual fund manager response to 2030: Thrive v survive

The rapid pace of demographic, investment products and technology changes continues to have a significant impact on fund managers. They will need to respond to the changing expectations of investors, employers, regulators and society by focusing on strategic positioning, technology transformation, developing the workforce of the future and product innovation to be successful.

Strategic positioning
Technology transformation
Workforce of the future
Product Innovation

Strategic positioning

Mutual fund managers should focus on core competencies as industry trends will drive M&A, outsourcing and changing product line ups to meet evolving investor preferences. Asset and Wealth Management Revolution 2023: The new context highlighted some key themes for asset managers to evaluate over the next few years, including:

Steer through once-in-a-career upheaval: Identify and focus on your unique selling points, including focusing on what your firm is good at, drive operational efficiencies and rationalize sub-scale areas in your product suite.
Deliver at scale amid cost and competitive pressures: Greater transparency and competitive pressures will continue the downward pressures on fees leading toward an expected increase in strategic consolidations and partnerships.

Mega managers — the top five US mutual fund managers — may accumulate most of the growth between now and 2030, accounting for 65% of mutual fund AUM by 2030, up from 55% in 2022. Additionally, 20% of current mutual fund firms will be acquired or eliminated by 2030.

Products will also be impacted by rising investor expectations leading to a 25% decline in mutual funds between now and 2030. This will be partially offset by other investment products, including ETFs, which we expect will increase by 35% between now and 2030.

Firms should continue to evaluate their operations to find further opportunities to achieve efficiencies and cost savings by outsourcing functions to third parties. However, firms will need to conduct proper due diligence, ongoing monitoring and effective risk management to confirm that outsourced functions are adequately controlled. We expect that mutual fund accounting outsourcing could rise from 72% in 20221¹³ to 80% by 2030.¹⁴ We also expect firms to expand outsourcing in such areas as compliance, trading, technology, distribution, etc.

_{¹³PwC analysis based on Simfund data, Form ADV and internal estimates

¹⁴Ibid.}

Technology transformation

Technology advances will likely have a significant impact on the mutual fund industry. Developments in cloud technology, blockchain, artificial intelligence and machine learning can help firms develop more efficient and cost-effective operations, enhance trading and investment strategies, and create more customized and personalized investment products.

Generative AI: Artificial intelligence technology that focuses on creating, enhancing, summarizing and new content or ideas based on existing data. Generative AI requires new skills, new talent considerations and an innovation-oriented culture.¹⁵ PwC predicts that AI could contribute up to $15.7 trillion to the global economy by 2030 based on the findings of the firm’s “Sizing the Prize” study on AI’s economic impact.¹⁶ Given the scale and speed at which generative AI is developing, it is critical for firms to embed governance, risk management and controls to address ethical, legal and regulatory considerations. Generative AI applications for asset managers are endless and we encourage firms to think beyond use cases. See How to leverage generative AI to unlock value and reinvent your business for further insights.
- Robo-advisors and online platforms: These tools and platforms use algorithms and automation to provide investment recommendations and portfolio management services to investors.
- Robotic process automation (RPA): RPA helps to automate repetitive and rule-based tasks such as data entry, reconciliation and compliance processes. Firms achieve more efficient, cost-effective and accurate results using RPA.
- Big data and machine learning: Firms are using big data and machine learning techniques to analyze market data, social media and other relevant sources to identify investment opportunities and manage portfolio risks.
- Blockchain and distributed ledger technology (DLT): While this area is still emerging, it holds the potential to enhance trading, clearing, settlement, record-keeping, custody and transfer agent operations. Tokenization is set to reshape industry by modernizing processes through automation.
- Metaverse: This technology may help industry with onboarding, training, interacting with work colleagues and creating virtual content to engage with customers.

Firms should continue to invest in technology, including artificial intelligence, to control costs as well as to meet the expectations of investors and employees.

_{¹⁵PwC 5 generative AI takeaways for CEOs, March 2023

¹⁶PwC "Sizing the prize: What's the real value of AI for your business and how can you capitalize?"}

Workforce of the future

The workforce of the future in the mutual fund industry will continue to evolve in response to changing dynamics. Firms should consider several important areas.

Work flexibility and hybrid arrangements, including updating work policies, investing in technology enhancements to facilitate flexible work arrangements to help attract and retain talent and maintain work-life balance.
Training and upskilling to keep up with the rapid changes in investment products, regulations and technology, including artificial intelligence and data analytics.
Confirming that employees understand the firm’s values and purpose.

Product Innovation

New products should be tailored to evolving investor expectations, particularly the investor of the future who takes risks, is socially conscious and prefers a tech-enabled experience.

To attract a wide range of investors, fund managers should offer a more tech-enabled experience that includes apps, online platforms and robo advisors as well as interactive tools for reviewing portfolios and transactions. Asset managers should also enhance the investor experience, leverage data and create more personalized investment products by leveraging the continued evolution of cloud computing, artificial intelligence, blockchain and machine learning, which can help asset managers operate more efficiently and cost effectively.

Adapt now to thrive

The impact of changing expectations for investors, regulators, employees and society will shape the future of the mutual fund industry. Inflation, market volatility and geopolitical conflicts have given new urgency to the challenges facing mutual funds. For mutual fund managers to be future-fit, they’ll need to address several issues.

Strategic positioning: Adapt business strategies, including strategic acquisitions, outsourcing strategies and product mix.
Technology transformation: Undertake a technology transformation to create more efficient and cost-effective operations, enhance trading and investment strategies, and create more customized and personalized investment products.
Workforce of the future: Develop more engaged employees by creating upskilling opportunities, making firm culture a catalyst for change, nurturing employee interest in artificial intelligence, and assigning meaningful work that aligns with the firm’s goals.
Product innovation: Tailor investment product lineups to evolving investor expectations, factoring in risks, socially conscious products and a tech-enabled experience.

The uncertainty of the future provides the mutual fund industry with an opportunity to transform between now and 2030.