What happened
The stock market suffered one of its worst declines in years on Monday, with the Dow Jones Industrial Average and S&P 500 both falling by more than 7%.
The financial sector was particularly hard-hit, with the Financial Select Sector SPDR ETF (XLF 1.09%) falling by nearly 11% in Monday's dramatic market plunge. So it shouldn't be a big surprise that asset management firm Affiliated Managers Group (AMG 0.18%) was in the same boat.
Image source: Getty Images.
So what
Affiliated Managers Group is an asset management firm, so it shouldn't be surprising that it's dropping. Asset managers generate the bulk of their revenue from client fees, which are often based on a percentage of assets under management.
When markets fall, the values of client accounts fall; at the same time, clients tend to become more hesitant to commit new capital. Because this results in a smaller pool of money on which Affiliated Managers Group can charge fees, the company has less fee income potential, which translates to lower profits.
Now what
At this point, it remains to be seen whether this will be a relatively quick market plunge and rebound or if we're in the early innings of a long bear market. Either way, the drop in Affiliated Managers Group's share price today is justified, given the reduced profit potential that results from the broad stock market decline.
