Regulation is helping major investment houses while pushing some boutiques out the industry, James Sullivan, managing director and fund manager at boutique asset manager Miton Optimal, has warned.
He said large providers of both passive and active funds are likely to benefit from the likes of the Markets in Financial Instruments Directive II, introduced in January, and the General Data Protection Regulation (GDPR), which came into force in May.
The Markets in Financial Instruments Directive (Mifid) is a set of rules designed to make the investment industry more transparent.
For the first time, fund managers will have to budget separately for research and trading costs, a move known as unbundling.
GDPR aims to give control to citizens and residents over their personal data and means companies can have to erase the information they gold about clients.
Miton's Mr Sullivan said the challenge presented by these rules for smaller investment houses was many of the costs of complying with regulation are fixed, so the firm with a smaller pool of assets, and therefore smaller revenue, will see disproportionately greater costs.
As a result, he said, the margins that can be achieved by fund managers are reduced, which makes asset gathering more important.
He said the consequence of extra regulation will be to push investors towards the largest investment houses and towards passive investments.
Mr Sullivan said: "I do not believe that the shift towards passives is cyclical; it is much more structural than that, amplified by the unintended consequences of directives such as the Retail Distribution Directive (RDR) and Mifid II.
"I suspect the 'authorities' will find themselves wrestling with an ETF monster in years to come, wondering how we got there.
"As asset managers, we need to get better at asking clients 'what do you need' rather than 'this is what we have'. As an industry our service levels must improve to remain a viable proposition."
Keith Ashworth-Lord, who runs the £374m Sanford Delland UK Buffetology fund, agreed that the time and monetary cost of complying with the Mifid and GDPR regulations will make it more difficult for boutique investment firms to survive in future.
Mr Ashworth-Lord's fund is the absolute top performer from 277 funds in the IA UK All Companies sector over the past year.
He said he has been able to build the small asset management firm of Sanford Delland and grow it in recent years, but he worries such an endeavour may not be possible in future due to the "extra work" involved in complying with Mifid and the GDPR.
He said: "It will be harder for new firms to set up, and harder to stay in business because of the sheer amount of time it takes to comply with the regulations.
"There won't be as many boutique firms in future."
Mr Ashworth-Lord said regulatory change has impacted all parts of the financial services sector, and there will be 'blood on the streets among analyst firms' due to fund managers no longer being permitted to pay for research unless they are willing to absorb the costs themselves.