* Rich margins crimped by changes to market structure
* Reuters analysis shows fee margin falling for some firms
* Revenue per employee also falling; may herald job cuts
By Simon Jessop, Sinead Cruise and Trevor Hunnicutt
LONDON/NEW YORK, Sept 21 (Reuters) - Home to trillions ofdollars of global wealth, mutual fund firms face an unfamiliarround of belt-tightening as changes in the way people invest andrising costs chip away at rich margins.
After years of underwhelming returns in a low-interest rateenvironment, savers are dumping high-fee funds in favour ofcheaper investment products, forcing asset managers to look moreclosely at the balance between income and costs.
Increased regulation after the global financial crisis ispushing up the cost of doing business for the establishedplayers while nimble technology-driven rivals are springing upto offer alternative investment products at a lower price.
"Strong inflows over a number of years have mitigated theneed to make hard, cost-cutting decisions," said AlastairSewell, regional head for Europe, the Middle East, Africa andAsia-Pacific in the fund and asset manager group at Fitch.
While the first signs of pressure are already being felt,Sewell said the biggest hits would likely come if an economicdownturn prompted more investors to move their money.
"When the cycle turns, and we start to see a trend towardsoutflows -- that is when the cost-cutting question will start tobite," he added.
Firms could respond by cutting jobs, particularly amongback-office staff, streamlining product ranges and makinggreater use of technology. More takeovers of the thousands ofsmall firms operating globally could be another consequence.
A Reuters analysis of the annual reports of the world'sbiggest listed, standalone asset managers between 2005/6 and2015 showed the strain is already being felt. While someoperations have been trimmed, more cuts may be on the way.
The average firm analysed increased assets by more than 200percent in the decade to end-2015 but just five out of the 11firms managed last year to grow their assets under management -- the primary driver of revenues.
Eight firms posted a fall in the revenue generated by eachemployee between 2014 and 2015, while the four firms which brokeout their management fee margin -- the ratio of net fees earnedto average assets under management -- all showed a fall.
While nine still managed to raise their operating margins in2015, for example by growing their asset base or moving to amore profitable mix of products, just one firm -- Swiss-basedGAM Holding - cut staff, the biggest cost.
Despite that, bosses of some of the firms chalked up abumper year personally. BlackRock's Larry Fink, forexample, pocketed $25.8 million in compensation, up 8 percentfrom 2014, a filing showed.
This year, though, BlackRock, the world's biggest assetmanager, and Pimco, the U.S.-based bond house owned by Germaninsurer Allianz, have both launched plans to shed 3percent of staff, sources said.
CHANGING FLOW
Consultants PwC suggested total assets managed by the globalfunds industry would grow to $100 trillion by 2020 although theysaid rising costs were expected to weigh on profits.
And within that figure, global demand for cheapexchange-traded funds (ETFs) would also rise, following the leadof the United States, where ETFs account for 17 percent of totalindustry assets, trade body Investment Company Institute (ICI)said.
Between 2012 and 2020, passively invested mutual fund assetsare expected to grow from $3.4 trillion to $10.5 trillion, whilepassively invested institutional mandates are set to grow from$3.9 trillion to $12.2 trillion, PwC said.
The biggest fund firms in the industry are taking notice.
"There are fixed costs to managing funds. Asset managersmust either bring those costs down, or find another way to passthe cost on to investors," said Bill McNabb, chief executive ofVanguard, whose firm manages $3 trillion across both passive andactive funds.
"There's no free lunch", he said.
As a result, average fees were already starting to fall.Equity investors in the United States, for example, have seentheir yearly costs drop from 1 percent of assets at the turn ofthe century to 0.68 percent last year, the ICI said.
Fees paid by European investors have fallen 8 percent overthe last three years, industry data tracker Morningstar said.
Changing investor habits were already being seen elsewherein Europe, where households were investing more into pensionsand life insurance products, resulting in large, butlower-margin mandates for asset managers, Fitch's Sewell said.
And in the United States, new Department of Labor rulescovering retirement accounts are expected to push assets tofewer providers and lower-cost funds.
At the same time, regulators have ramped up rules fordisclosure and transparency, which carry a hefty price tag tomeet, including in hiring staff to ensure compliance.
OVERHAUL BEGINS
European firms are likely to save some costs by cutting outfees paid to the intermediaries who sell their products to 'momand pop' retail investors, but bigger overhauls of fund rangesand headcount will be needed to buoy margins.
This could involve reducing the number of share classes ineach fund, merging products and using technology such asBlockChain to make custody and trade reconciliation processescheaper.
A mass cull of front-office staff is unlikely but sales,distribution and trading jobs are at risk, industry analystssay, with the latter replaced by algorithmic trading.
BlackRock, which employs more than 13,000 people, alreadyuses data to pinpoint which financial advisers are most likelyto recommend its funds for clients, while Franklin Templeton now uses software to part-write fund commentaries.
Some asset managers are also exploring ways to use so-called'robo advice' to sell funds more cheaply online, and have plansto use artificial intelligence to improve stockpicks.
"We've been able to invest in new technologies to streamlineour global trading operations, resulting in greaterefficiencies," said Vanguard's McNabb.
"We certainly believe that those who wish to remain relevantmust continue to seek out and leverage new technology. A managercan rein in costs by operating a lean shop but that will onlyget you so far."
And while nine of the firms analysed maintained or grewtheir dividends in 2015, Reuters data showed a weakening inother measures of shareholder returns, with six posting a weakerreturn on equity and return on invested capital.
This strengthens the case for industry consolidation as theworld's 7,723 fund firms and 284,422 individual funds tracked byThomson Reuters Lipper search for the best way to survive.
Smaller funds could look for shelter in the arms of a largerrival better able to cope with the increased regulatoryexpenses, a fall in sales of higher-fee products and increasedcompetition from upstart tech firms.
"You can run a cheaper cost base just because you'rebigger," said Detlef Glow, head of Lipper research in Europe,the Middle East and Africa. "Size matters."
(Editing by Keith Weir)
