The way the financial markets moved up, down, then back up again during the first half of 2025 has had a whipsaw effect on those of us participating in the financial services industry. Despite this, investors seemed more resilient than ever to geopolitical tensions, trade policy uncertainties, and rising national debt, and the first half of the year closed out with major stock market indexes showing gains. Investors, of course, were happy to see positive returns.
Even with happy investors, fund independent directors have a responsibility to assess how the funds they oversee respond to intermittent market fluctuations. Such assessments include examining fund reactions to volatility and the impact of that volatility on flows, assets under management, related revenue, and profitability, among other factors specific to each fund and family under their oversight.
While assessing any Gartenberg factor over a short-term period can be misleading, examining influences and trends from recent periods can help directors better understand the drivers behind recent changes and the reasonableness of those changes, as well as gain insights into longer-term results and future business decisions.
How Firms, Funds Fared
When earnings for the first half of 2025 were announced, the results of publicly traded asset managers revealed how market volatility affected the firms' performance and highlighted several common themes that can offer boards insights into firm and fund profits. Despite notable market downturns during the period, January started strong and June finished with overall gains, leading to a year-on-year increase in the average six-month AUM for nearly all sample firms, regardless of total net flows.
Many of the firms in the sample group are larger, more diversified companies, which can enable them to attract or retain AUM through multiple product and strategy lines and therefore best reflect the overall growth of the markets. Most of the investment advisers sampled benefited from the same advice they give to their clients: Diversify—geographically and strategically, as well as among investment products.
Fund flows varied among the sample firms based on products, strategies, distribution channels, and acquired assets. While market indices did not suggest investor sentiment concerns, net flows generally favored more conservative investments like taxable bonds and money market funds, which typically have lower fees, along with a continued move toward indexed products. When inflows occurred in actively managed funds, they were often directed into exchange-traded funds, which typically charge lower fees than their open-end counterparts. The shift of AUM to these strategies and products caused most of the sample firms to experience a decline in the average basis point fee earned on revenue, with only one exception.
While product diversification helped retain and, in some cases, grow AUM at the sample firms, fund independent directors of other complexes might have seen very different trends depending on the specific funds they oversee. For example, if a board only oversees small-cap products, directors might have seen a decline in average AUM due to market depreciation combined with net outflows caused by decreased product demand during that period. However, the AUM may not have shifted toward lower-fee products, and the overall basis points collected might not be a concern.
Examining Expenses
Equally important is understanding how expenses respond to changes in fund and firm AUM, as well as how they impact both advisory and operating margins. Among the sample firms, some achieved scale through revenue growth. Still, due to declining fee rates, most firms saw their expenses grow faster than their revenue, resulting in a decrease in operating margins for approximately 70% of these companies. Much of this results from variable expenses that are driven by changes in AUM versus revenue. Additionally, so far in 2025, nearly all sample firms have launched new products, with many making investments in acquisitions or mergers. Many of these investments involved private assets, alternative assets, or other specialty investment firms.
Understanding the fixed and variable parts of expenses can reassure directors about the company's financial stability, especially at smaller firms, and help ensure the adviser continues to support critical investment, legal, and compliance activities for investors. Seeking clarification on lasting changes to expenses, such as real estate or headcount, versus short-term fluctuations resulting from investments in marketing or technology efforts, can provide comfort regarding future expense trends and the capacity for investment in the business. This applies whether evaluating new product launches, assessing the current and future viability of existing funds under all market conditions, or exploring other business investment opportunities.
The first half of the year shows that many factors can impact margins. While it is essential for independent directors to receive useful reporting—providing enough detail, trend analysis, explanations for changes, and industry context—the most reliable source remains discussions with the adviser. Asking specific questions and requesting any additional information needed provide an opportunity to gain comfort not only in recent margin changes but also in future revenue and expense planning, as well as how the adviser and the funds are positioned in relation to upcoming business decisions.
3Q End and Beyond
As the end of the third quarter approaches, market gains have continued with less volatility than in the first half of the year, suggesting that rising average AUM will likely continue for these sample firms, if not their revenue and profits. This will depend on the effects of ongoing trends toward overall flows into lower-fee products, as well as firms' expenses from investments in new product launches, marketing, technology, and staffing.
The final quarter of the year remains uncertain amid questions about the strength of the dollar, job market stability, rising living costs, and potentially inflated company valuations. However, if markets experience a downturn, understanding what has influenced recent results in fund and firm margins across advisory, administrative, servicing, and distribution channels can help in preparing directors for what might be coming. If margins are already declining due to lower average basis point fees, reduced AUM, or net outflows, directors understand that investors might shift to certain higher-fee strategies, but the likelihood of returning to higher-fee products is less likely. Beyond variable expenses, there may be operational efficiencies and investments in the business that can be delayed, but as competitive industry pressures persist, retaining and attracting new assets to sustain margins may become an increasingly challenging task. This, of course, may leave directors to question when investors could end up vulnerable, or even compromised.
Sara Yerkey is a partner at Management Practice, where she has worked since 2007, leading the firm’s 15(c) practice and focusing on the areas of mutual fund governance, contract renewal, and profitability analysis. She began her career in Standard & Poor’s financial analysis and product sector, shifting in 2001 into the mutual fund industry at Janus Capital Group in the firm’s corporate finance division and ultimately becoming director of financial analysis and strategy. Sara serves as a member of the FBV Editorial Think Tank.