Executive Summary / Key Takeaways

• Strategic Evolution Amidst Industry Headwinds: T. Rowe Price is actively transforming its business model to counter industry-wide fee compression and the shift towards passive investing, focusing on expanding into new vehicles like ETFs and SMAs, enhancing its retirement solutions, and leveraging strategic partnerships.
• Robust Financial Health and Capital Returns: Despite recent net outflows, the firm maintains a strong balance sheet with ample liquidity, consistently returning capital to shareholders through dividends and opportunistic share repurchases, while also funding strategic investments.
• Technological Edge and AI Integration: T. Rowe Price is investing significantly in technology, including a dedicated Technology, Data, and Operations function and AI tools like 'Investor Copilot,' aiming to drive productivity, enhance alpha generation, and enable greater customization at scale.
• Goldman Sachs Collaboration and Alternatives Push: A key strategic partnership with Goldman Sachs (GS) is set to deliver innovative public-private investment solutions for wealth and retirement channels, significantly expanding T. Rowe Price's reach and capabilities in the high-growth alternatives space, particularly private credit.
• Expense Management for Future Investment: The company is implementing a multi-year expense management program, including workforce reductions and real estate optimization, to generate efficiencies that will be reinvested into strategic priorities, targeting low single-digit controllable expense growth for 2026 and 2027.

The Active Manager's Evolution: A Foundation for Future Growth

T. Rowe Price Group, Inc. (TROW) stands as a venerable institution in the asset management industry, founded in 1937 with a core mission to provide investment advisory services to a diverse clientele spanning individuals, institutional investors, and retirement plans. The firm's enduring strategy has been rooted in active management, employing rigorous fundamental and quantitative analysis with a bottom-up approach. This research-driven ethos has been a cornerstone of its competitive advantage, fostering a culture of independent proprietary research.

The industry landscape, however, is in constant flux, characterized by the persistent rise of passive strategies, ongoing fee pressure, and an increasing demand for new investment vehicles and sophisticated solutions. T. Rowe Price has not been immune to these trends, facing elevated net outflows in its equity franchise. In response, the firm has embarked on a significant strategic evolution, aiming to align its expense growth with anticipated revenue, realign resources, and make targeted investments in future capabilities. This proactive stance is critical for an active manager in an environment where market concentration, particularly in mega-cap growth sectors, has made alpha generation challenging.

A pivotal moment in T. Rowe Price's recent history was the December 2021 acquisition of Oak Hill Advisors (OHA), which dramatically expanded its footprint in private market alternatives, especially in credit. This move signaled a clear intent to diversify beyond traditional public markets and capture growth in less liquid asset classes. The firm's strategic initiatives also include a concerted push into the insurance sector, evidenced by a strategic partnership with Aspida, and a significant expansion of its ETF business. These efforts collectively underscore a commitment to adapting its offerings and distribution channels to meet evolving client needs and market demands.

Competitive Dynamics and Market Positioning

T. Rowe Price operates in a highly competitive global asset management industry, vying for assets against a spectrum of firms ranging from large, diversified players to specialized boutiques and increasingly, technology-driven platforms. Its primary direct competitors include industry giants like BlackRock (BLK), State Street (STT), Invesco (IVZ), and Franklin Templeton (BEN).

T. Rowe Price differentiates itself through its deep-rooted expertise in active management and a strong emphasis on environmental, social, and governance (ESG) factors. While BlackRock excels in passive strategies and boasts a formidable technology platform like Aladdin, T. Rowe Price's strength lies in its research-intensive, customized portfolio solutions, particularly appealing to clients prioritizing long-term, fundamentally driven active management and sustainable investing. This focus on ESG integration enhances T. Rowe Price's market positioning, potentially allowing for pricing power and revenue opportunities in these specialized segments.

Compared to State Street, which is dominant in custodial services and asset servicing, T. Rowe Price's edge is in its direct client relationships and product differentiation within active equity management. While State Street may exhibit superior operational efficiency and cash flow from its servicing scale, T. Rowe Price's strategic adaptability in active management remains a key differentiator. Against Invesco and Franklin Templeton, both of which offer broad active and alternative investment lineups, T. Rowe Price's in-house research and ESG focus provide a unique value proposition, though it acknowledges potential lags in the speed of innovation for alternative products compared to some peers.

Indirect competitors, including robo-advisors and fintech platforms, pose a challenge by offering lower-cost, more accessible entry points for retail investors. This dynamic contributes to industry-wide fee compression, impacting all traditional asset managers. T. Rowe Price's response involves expanding its own lower-fee offerings, such as its growing ETF suite and blend products, and investing in technology to enhance customization and advice at scale. The firm's competitive advantages, or "moats," include its strong brand in active management, a global network, and its ESG expertise, which foster client loyalty and recurring revenue. However, vulnerabilities include a potential over-reliance on active management fees and the need for continuous innovation in digital tools to keep pace with the rapidly evolving technological landscape.

Technological Differentiation and Innovation

T. Rowe Price recognizes that technology is not merely a support function but a core differentiator and a catalyst for growth. The firm has been building internal capabilities in data science, machine learning, and predictive models since 2017, aiming for "intelligent augmentation" of its investment processes. This approach is designed to provide investors with additional data points, aid decision-making, and unlock productivity gains.

A tangible example of this is Investor Copilot, an internal AI tool. This custom chatbot, embedded within the firm's private research platforms, is currently used by 280 investors to summarize proprietary research and service insights. While management views generative AI technology as nascent, its stated goal is to add material business value by enhancing productivity and potentially generating alpha. The strategic intent is clear: AI will drive productivity, reduce costs, and, crucially, enable growth by transforming how investment solutions are created, how real-time, curated advice is delivered across channels, and how customization is achieved at scale. This focus on AI is expected to contribute to a competitive moat by making T. Rowe Price's investment research faster, sharper, and more efficient, ultimately leading to better outcomes for clients and improved financial performance through enhanced alpha generation and operational efficiency.

Beyond internal tools, T. Rowe Price is actively exploring new technologies and digital assets. The firm filed for a multi-token crypto ETF (ETP), signaling its entry into the digital asset space. This initiative, which began in 2022, is premised on the belief that digital assets will offer both operational and investment alpha and will become a growing part of client portfolios. The firm's multi-asset team has conducted extensive research into the momentum, volatility, and tail-risk characteristics of these assets, positioning T. Rowe Price to be an innovative solutions provider in this emerging area.

Furthermore, the recent creation of a new Technology, Data, and Operations function, led by a Chief Technology Officer, underscores the firm's commitment to integrating digital capabilities with operational excellence. This organizational realignment aims to adapt to changing industry dynamics, accelerate execution, and build systems and tools that enable deeper integration of technology and data-driven decision-making across the business. This strategic move is designed to enhance the firm's competitive standing by improving efficiency, fostering innovation, and delivering scalable solutions for technology-enabled growth.

Financial Performance and Operational Details

T. Rowe Price's financial performance in the first nine months of 2025 reflects a period of strategic realignment and adaptation to market dynamics. For the three months ended September 30, 2025, total net revenues increased by 6% to $1,893.50 million compared to the prior year, primarily driven by higher investment advisory fees on increased average assets under management (AUM) and a rise in capital allocation-based income. For the nine months ended September 30, 2025, net revenues grew 2.10% to $5,380.70 million. Investment advisory fees, which constitute approximately 90% of net revenues, rose 4.40% in Q3 2025 to $1,698.70 million and 2.80% for the nine-month period to $4,864.70 million, supported by a 7% increase in average AUM to $1,644.40 billion for the nine-month period.

However, the average annualized effective fee rate (EFR) declined by 3.90% to 39.10 basis points in Q3 2025, and similarly for the nine-month period, primarily due to a mix shift in client flows and transfers towards lower-fee strategies and products. This trend is a direct consequence of the broader industry shift towards lower-cost vehicles and strategies, including the growing adoption of collective investment trusts and ETFs.

Operating expenses on a U.S. GAAP basis increased by 6.7% in Q3 2025 to $1,250.30 million, and by 4.5% for the nine-month period to $3,662.90 million. This increase was driven by a $28.50 million restructuring charge, higher technology and facilities costs (up 11.70% in both periods), and increased accrued carried interest compensation. The restructuring charge, primarily severance-related, was part of a broader plan to reduce expense growth and realign resources. The operating margin, consequently, saw a slight dip to 34% in Q3 2025 from 34.40% in Q3 2024, and to 31.90% for the nine-month period from 33.50% in 2024, as expense growth outpaced net revenue growth.

Diluted earnings per share (EPS) for Q3 2025 rose to $2.87 from $2.64 in Q3 2024, benefiting from higher operating income, increased investment gains, and fewer weighted-average shares outstanding. For the nine-month period, diluted EPS was $7.25, a marginal increase from $7.23 in 2024. The firm's net profit margin (TTM) stands at 28.89%, with an operating profit margin (TTM) of 31.73% and an EBITDA margin (TTM) of 41.61%, reflecting solid, albeit pressured, profitability.

T. Rowe Price maintains a robust liquidity position, with cash and discretionary investments totaling $4,278.40 million as of September 30, 2025, a significant increase from $3,106.90 million at December 31, 2024. Operating activities provided $2,380 million in cash flow during the first nine months of 2025.

The company remains committed to returning capital to shareholders, increasing its quarterly dividend to $1.27 per share in February 2025 and repurchasing 4.80 million shares for $483.80 million in the first nine months of 2025. Capital expenditures for 2025 are projected at $275 million, with over 80% allocated to technology initiatives, funded by operating cash flows.

Strategic Initiatives and Growth Drivers

T. Rowe Price is aggressively pursuing several strategic initiatives to drive growth and enhance its competitive standing. A cornerstone of this strategy is the recently announced strategic collaboration with Goldman Sachs. This partnership aims to deliver innovative public-private investment solutions across wealth and retirement channels. Initial offerings include a co-branded sister series for the Target Date franchise, model portfolios with alternative allocations, multi-asset public-private market solutions, and personalized advice solutions for adviser-managed accounts. The co-branded Target Date series, incorporating T. Rowe Price public equities and fixed income, OHA private credit, and Goldman Sachs alternatives, is expected to launch mid-2026. This collaboration is designed to leverage the strengths of both firms, with T. Rowe Price acting as adviser on the sister series and multi-asset solutions, and Goldman Sachs advising on model accounts. The economics are structured to be balanced and equitable, with aspirations for asset growth "meaningfully greater than a couple billion dollars" over a three-year horizon from these new products.

The ETF business continues to be a significant growth driver, with AUM reaching $19 billion as of September 30, 2025, and nearly $2 billion in net inflows during Q3 2025. T. Rowe Price has doubled its market share in active ETFs in each of the past two years, now holding approximately 1.5% of the U.S. active ETF market. The firm plans further expansion, with over a dozen new ETFs in the pipeline, including active core equity and fixed income strategies. This growth is supported by investments in specialized distribution and marketing efforts, targeting RIAs and other ETF users.

The Target Date franchise remains a core strength, with $552.90 billion in AUM as of September 30, 2025, and $2.60 billion in net inflows in Q3 2025. The firm's Target Date funds demonstrate strong long-term performance, with 81%, 71%, and 98% of fund assets beating peer groups on a 3-, 5-, and 10-year basis, respectively. T. Rowe Price is also expanding its retirement offerings internationally, launching new retirement allocation funds in Asia and Canada. The firm is actively exploring the integration of private market alternatives into its Target Date funds, recognizing the potential for enhanced participant outcomes, though acknowledging concerns around fees and fiduciary risk that may lead to a gradual adoption.

OHA's private credit capabilities are central to the alternatives strategy, with a record capital-raising year in 2025, securing over $6 billion in gross capital commitments in Q3 2025. While private credit deployment has been consistent, an acceleration in deal activity points to a robust pipeline for future growth. The firm's managed account model delivery assets, totaling $9.20 billion as of July 1, 2025, are now integrated into reported AUM, reflecting the growing importance of this flexible delivery mechanism.

T. Rowe Price is also implementing a comprehensive expense management program to align cost growth with revenue trends. This includes a workforce reduction in July 2025, which decreased associate headcount by 3.40% from September 2024, and a decision to exit two office buildings in Owings Mills, Maryland, expected to result in a $100 million non-cash charge in Q4 2025. These initiatives are designed to generate efficiencies that will be reinvested into strategic priorities, with a target of low single-digit controllable expense growth for 2026 and 2027.

Outlook and Guidance

T. Rowe Price's management anticipates a challenging, yet improving, flow environment. The outlook for Q4 2025 flows is projected to be weaker at the margin, primarily due to higher equity redemptions driven by market rebalancing and continued passive share gains. However, the firm's base case for full-year 2025 is an improvement in net outflows compared to 2024, signaling progress towards a return to organic growth. While a definitive timeline for achieving positive net inflows remains difficult to predict, management is confident in the long-term path, underpinned by strong investment performance and strategic growth initiatives.

For 2025, adjusted operating expenses, excluding carried interest expense, are expected to increase by 2% to 4% over 2024's $4.46 billion. This guidance incorporates ongoing expense management efforts and the impact of real estate costs associated with the new Baltimore headquarters and the exit of Owings Mills buildings. Looking ahead, the firm aims to keep its controllable expense growth rate in the low single digits for 2026 and 2027, leveraging process improvements, technology, and strategic vendor partnerships. The effective tax rate for full-year 2025 is estimated to be in the range of 23% to 26% on a U.S. GAAP basis, and 23.50% to 25.50% on an adjusted basis, with potential volatility due to market fluctuations impacting stock-based compensation and changes in deferred tax asset valuation allowances.

Risks and Challenges

Despite a clear strategic roadmap, T. Rowe Price faces several pertinent risks. The ongoing trend of fee compression and the mix shift towards lower-fee products will continue to pressure revenue and profitability. The firm's reliance on active management makes it vulnerable to periods of market concentration and factor volatility, which can make outperformance challenging. Elevated equity outflows remain a headwind, requiring sustained strong performance and successful diversification into other asset classes and vehicles.

The integration of private market alternatives into defined contribution plans, while a significant opportunity, is subject to fiduciary risk concerns and the need for clearer regulatory guidance from the DOL and SEC. Operational risks include the execution of the multi-year expense management program, including workforce actions and real estate consolidation, which may incur non-recurring charges. The contingent consideration liability related to the OHA acquisition, while currently valued at zero, represents a potential future cash outflow if revenue targets are met.

Conclusion

T. Rowe Price is undergoing a significant transformation, strategically adapting its venerable active management model to a rapidly evolving investment landscape. The firm's core investment thesis hinges on its ability to leverage its deep research capabilities and client-first culture to deliver best-in-class solutions across an expanding array of vehicles and asset classes. Key initiatives, such as the strategic collaboration with Goldman Sachs, the aggressive expansion of its ETF and alternatives businesses, and a focused investment in AI and digital assets, are designed to drive future growth and enhance its competitive moat.

While facing persistent industry headwinds like fee compression and the shift to passive investing, T. Rowe Price's proactive expense management program is crucial for self-funding these strategic investments. The firm's strong balance sheet and commitment to capital returns provide a solid foundation. Investors should monitor the execution of these strategic initiatives, particularly the success of new product launches and partnerships, the trajectory of net flows, and the realization of efficiencies from its operational realignment. T. Rowe Price's ability to seamlessly integrate technological advancements and adapt its offerings to meet the evolving demands of both wealth and retirement clients will be paramount in securing its position as a leader in the next generation of asset management.