The investment management industry is at a crossroads. Amid rising consolidations, cost pressures and the ongoing commoditization of long-only active management, artificial intelligence is expected to drive further efficiency gains and cost compression.
Against this backdrop, managers are increasingly moving basic portfolio strategies out of traditional mutual fund structures and into lower-cost, more tax-efficient exchange-traded fund wrappers.
In view of this fast-evolving context, financial services experts shared their assessment of the changes underway, revealing which managers will be best positioned to thrive.
Moody’s, in a December 2025 report, wrote that asset managers worldwide “face weakness in profitability from lower management fees and rising costs for personnel, technology and distribution.”
The firm estimated that “the average asset manager organic growth rate is just under 2% per year,” and while traditional equity active management has experienced outflows for more than 10 years, “industry organic growth will get a boost in 2026 from rising preferences for newer areas like active ETFs and customized [separately managed accounts] and the expansion of investor access to private market investments.”
The ratings agency stated the trends mean firms with superior operations capabilities, high organic growth and the ability to thrive in private markets are poised for success in 2026. Conversely, firms with a strong reliance on traditional, active equity strategies face headwinds, including outflows.
Oliver Wyman, late last year, reported that scale will be important for asset managers in 2026, but that midsize firms face the biggest challenges.
“Fund managers with more than $2 trillion of assets under management have average margins of roughly 45%; those with less than $500 billion have average margins of 36%; but those in the middle are caught in a ‘Valley of Death’ with average margins of 26%—squeezed between scale and simplicity,” the firm stated.
Unpacking the ETF Boom
Though ETFs have existed since the mid-1990s, their prevalence accelerated following a 2019 regulatory update that simplified fund creation. The conversion of mutual funds into ETFs has since surged, with ETF assets reaching a record $13.4 trillion in January. Citing Morningstar Group data, Bloomberg reported in August 2025 that ETFs now outnumber individual stocks in the U.S.
Despite a longstanding concern that ETFs potentially drive volatility, a new Federal Reserve report suggested that the opposite has been true. Analyzing the effects of large conversions in June 2021, the authors found that increased ETF ownership correlated with lower stock price volatility and improved liquidity.
The average ETF also costs less than a typical mutual fund, according to data from Fidelity. The median expense ratios for index ETFs have historically been about 0.56%, compared with 0.90% for index mutual funds. Those costs have trended downwards for years: Between 2008 and 2024, average index equity ETF fees fell by 30% and bond ETF fees fell by 25%, reaching about 0.40% for equity ETFs and 0.20% for bond ETFs in 2024.
“During the last 30 years, ETFs have slowly surmounted the chicken-and-egg problem of trading liquidity versus spread cost,” says Brian Huckstep, the CIO at Advyzon Investment Management. “I believe it is inevitable that aggregate ETF assets under management will surpass mutual fund AUM soon, unless the IRS changes the tax laws on ETFs to remove the significant tax advantage that the funds have over mutual funds.”
Meb Faber, the co-founder and CIO of Cambria Investment Management, is emphatic that the tax and cost advantages of ETFs have positioned the vehicles at the center of a structural overhaul of investing, particularly in the U.S.
“American investors understand the idea of low fees and tax efficiency more than anyone else in the world,” Faber says, adding that tax efficiency continues to be one of the few remaining areas of “easy alpha” too often overlooked by investors.
That presents an area of opportunity for managers. Faber believes that slow-to-adapt institutional investors are becoming increasingly vulnerable to low-cost public ETF benchmarks that will, for many, force hard questions about whether expensive private market investments and active management are deserving of their fees.
However, both CIOs resist the notion that ETFs carry an inherent advantage over mutual funds.
“Mutual funds and ETFs both help investors own baskets of securities in an omnibus structure with other investors, which allows costs to be brought way down,” Huckstep says.
ETFs’ most significant benefit to investors is their relative ease of access and convenience. Mutual funds are subject to changing cost structures and purchasing requirements across various custodians, which are an adviser’s fiduciary responsibility to track in order to select the optimal share class for investors; ultimately, they risk becoming “a pain” to stay on top of, Huckstep says. ETFs, on the other hand, only have one share class and are therefore more straightforward to work with.
Simply put, ETFs lack the legacy friction of mutual funds, which makes them particularly appealing in a complex investment landscape.
Implications of AI
The exploding popularity of cost-efficient ETFs is unfolding in parallel with the growth of artificial intelligence tools and accelerating cost compression. AI presents central concerns for many managers in the years ahead. Experts, however, are not convinced that AI will radically change the game.
To the question of how managers might best leverage and scale AI, Faber says, “A lot of them probably shouldn’t.” Faber says the more realistic impact of AI is as an efficiency and cost-reduction tool, which he likens to the way email transformed adviser workflows without replacing advisers. In his view, managers should treat AI as infrastructure, not a differentiator, and Huckstep agrees.
“I have included quantitatively managed funds as part of my diversified portfolios for over 20 years and have met with over 100 quantitative fund managers who have been feverously trying to use computers to improve their fund alpha since before the C++ programming language was invented,” Huckstep says. “I expect AI’s improved processing power could help identify new sources of asset mispricing, but I do not expect any quantum leaps forward here. It’s like digging for gold, where many of the richest veins of easy-to-find riches have been discovered and exploited. Finding new riches requires a lot of effort and can be a lot less rewarding.”
In short, durable gains are likely to be structural and cost-driven in nature. To that end, experts say that the investment managers best positioned to succeed are those that either had the foresight to pivot their businesses years ago or those willing to make that leap while they still can.
“If you’re still stuck in traditional mutual funds, you should have converted them 10 years ago,” says Faber. Though it is still possible to retroactively correct the error, that window is narrowing fast, he adds.
Faber also warns against succumbing to what he calls the “ostrich strategy”—riding out the next 10 years without innovating on the assumption that the business will hold. That approach stops working in the event of “a nice fat bear market, like what we had in 2000 or 2008,” says Faber—a scenario he believes is “not remotely out of the question” and which could leave slow-moving institutions in dire straits.
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