Executive Summary / Key Takeaways

• Expense Discipline as Self-Funding Mechanism: T. Rowe Price has launched a material expense reset, cutting headcount 4% in July 2025 and taking a $100 million real estate impairment charge, with management guiding to low-single-digit controllable expense growth through 2027—effectively self-funding investments in ETFs, alternatives, and digital capabilities while core revenue faces headwinds.

• Fee Compression Accelerating Beyond Historical Norms: The effective fee rate has compressed to 39.1 basis points in Q3 2025, with management acknowledging fee pressure of roughly 2% annually—well above the historical 1-1.5% range—driven by client shifts to lower-fee target date trusts, blend series, and passive alternatives, directly offsetting AUM growth and threatening operating leverage.

• Strategic Pivot Shows Early Traction but Scale Remains Elusive: The ETF business has reached $19 billion AUM with $2 billion in Q3 inflows, and Oak Hill Advisors raised $6 billion in commitments, yet these growth engines remain small relative to the $1.77 trillion total AUM and haven't yet offset persistent outflows in higher-fee U.S. equity mutual funds.

• Core Franchise Bleeding Persists: U.S. equities continue driving net outflows for the fifth consecutive year, with management warning Q4 2025 flows look "weaker at the margin" due to rebalancing after strong market returns and continued passive share gains, making near-term organic growth unlikely despite strong target date performance.

• Valuation Reflects Turnaround Skepticism but Offers Downside Protection: At $105.79, TROW trades at 11.5x earnings and 19.9x free cash flow—significant discounts to active manager peers—while yielding 4.8% and maintaining $4.3 billion in cash with minimal debt, pricing in continued outflows but offering cushion if the strategic pivot gains scale.

Setting the Scene: The Active Manager's Dilemma

T. Rowe Price Group, founded in 1937 in Baltimore, Maryland, built its reputation on active management excellence and independent proprietary research. The core business model is straightforward: generate investment advisory fees based on assets under management, with the fee rate determined by asset class, vehicle type, and distribution channel. For decades, this model delivered predictable revenue growth and expanding margins as markets rose and active strategies commanded premium fees.

The industry structure has fundamentally shifted. Passive strategies continue taking market share from traditional active management, with eight stocks driving 60% of S&P 500 returns in 2024—a narrow market environment that punishes fundamental, valuation-focused approaches. Fee pressure has intensified to roughly 2% annually as scale players command lower rates and competition intensifies. Meanwhile, demand for new vehicles—ETFs, model delivery, private alternatives—has fragmented the product landscape, requiring continuous investment to remain relevant.

T. Rowe Price sits in the uncomfortable middle tier of asset managers. With $1.77 trillion in AUM as of September 2025, it lacks the scale of BlackRock (BLK) ($13.5 trillion) or State Street (STT) ($5.4 trillion) that drives passive product economics. Yet it maintains sufficient heft to compete with Franklin Resources (BEN) ($1.66 trillion) and Invesco (IVZ) ($2.12 trillion) in active strategies, while facing pressure from Vanguard's $11 trillion in low-cost index funds. The company's differentiation has historically rested on research depth and retirement leadership, but these moats are eroding as clients shift to lower-cost, outcome-oriented solutions.

Technology, Products, and Strategic Differentiation

The target date franchise represents T. Rowe Price's most defensible stronghold. With $553 billion in AUM and $2.6 billion in Q3 net inflows, these products benefit from Qualified Default Investment Alternative status under the Pension Protection Act of 2006. Performance remains robust, with 81%, 71%, and 98% of fund assets beating peers over 3-, 5-, and 10-year periods. Target date funds embed sticky, long-term retirement assets that are less sensitive to short-term performance and fee pressure than retail equity funds. The recent expansion into Canada and Asia, plus the Goldman Sachs (GS) partnership for a co-branded sister series launching mid-2026, extends this moat geographically and distributionally.

The ETF business, launched in 2020, has reached $19 billion AUM with nearly $2 billion in Q3 inflows—doubling market share each of the past two years to capture roughly 1.5% of the U.S. active ETF market. Twelve ETFs now exceed $500 million, with five surpassing $1 billion. Management has filed for eight additional active ETFs and has "over a dozen" in development for 2026, aiming to cover 75% of the Morningstar AUM universe. ETFs offer lower operational costs and broader distribution access than mutual funds, with management noting they're gaining platform placements where mutual funds historically couldn't access. However, the 39.1 basis point effective fee rate reveals the trade-off: ETF fees are structurally lower, so growth here accelerates AUM but dilutes revenue per dollar.

Oak Hill Advisors, acquired in December 2021, has become the cornerstone of T. Rowe Price's alternatives expansion. OHA raised over $6 billion in gross capital commitments in Q3 2025, with strong performance in senior direct lending and distressed mandates. The Goldman Sachs collaboration will incorporate OHA private credit across wealth and retirement channels, with multi-asset public-private solutions launching by mid-2026. Alternatives command higher fees and stickier capital, potentially offsetting compression in traditional equity products. The $221 million in unfunded capital commitments at the parent level provides visibility into future fee-bearing AUM growth.

The Goldman Sachs partnership announced in September 2025 represents T. Rowe Price's most significant strategic bet. Goldman intends to invest up to $1 billion in T. Rowe Price common stock and collaborate on public-private solutions across four areas: co-branded target date series, model portfolios, multi-asset offerings, and a managed account platform for independent advisers. T. Rowe Price will advise the target date and multi-asset solutions while Goldman handles model portfolios and technology integration. This combines T. Rowe Price's investment expertise with Goldman's distribution muscle and digital planning capabilities, potentially unlocking access to Goldman's wealth channels where T. Rowe Price has historically been underrepresented.

Financial Performance & Segment Dynamics

Third quarter 2025 net revenues of $1.89 billion grew 6% year-over-year, driven by higher investment advisory fees on increased average AUM and capital allocation-based income. For the nine months ended September 30, revenue rose 2.1% to $5.38 billion. This modest top-line growth masks intense pressure underneath. Investment advisory fees grew 2.8% to $4.86 billion, but the effective fee rate excluding performance fees compressed to 39.1 basis points from 40.7 basis points in Q3 2024—a 4% decline that directly offsets AUM gains.

The segment mix reveals the source of pressure. Equity advisory fees grew only 1.3% despite market appreciation, reflecting net outflows from higher-fee U.S. equity strategies. Multi-asset fees grew 4.7% to $1.4 billion, supported by target date inflows. Alternatives fees jumped 8.3% to $248 million, the fastest-growing category but still just 5% of advisory revenue. Fixed income fees grew 4.8% to $319 million. This mix shift toward lower-fee multi-asset and target date trusts, combined with outflows from premium-priced equity funds, explains why AUM can reach record highs while revenue growth stagnates.

Operating expenses tell a story of deliberate restraint. On a GAAP basis, Q3 expenses rose 6.7% to $1.25 billion, but this includes a $28.5 million restructuring charge from the July workforce reduction. On a non-GAAP basis, expenses grew only 3.2% to $1.13 billion, with technology and facilities costs driving the increase due to the new Baltimore headquarters occupied in March 2025. The company employed 7,830 associates at September 30, down 4% from year-end 2024. Management has guided 2025 adjusted operating expenses to grow 2-4% over 2024's $4.46 billion, down from initial guidance of 4-6%, and expects controllable expenses to grow in the low single digits in 2026 and 2027.

The operating margin compressed to 34% on a GAAP basis in Q3 from 34.4% in the prior year, and to 31.9% for the nine months from 33.5% in 2024. This reflects the restructuring costs and the fact that expense growth has outpaced revenue growth. However, the underlying trend shows management is gaining control of the cost base. The $100 million non-cash charge expected in Q4 2025 from exiting two Owings Mills office buildings will be excluded from non-GAAP measures, providing a cleaner view of operational efficiency in 2026.

Cash flow generation remains robust. Operating cash flow for the nine months reached $2.38 billion, up modestly from 2024, while free cash flow was $1.26 billion. The company held over $4.3 billion in cash and discretionary investments at September 30, with management estimating roughly half is available for strategic opportunities.

This liquidity supports the dividend, which was increased 2.4% to $1.27 per share in February 2025, and share repurchases of $484 million through September 30—double the full-year 2023 level. The 4.84% dividend yield provides downside protection while the strategic pivot plays out.

Outlook, Management Guidance, and Execution Risk

Management's guidance reveals a company in transition. For full-year 2025, adjusted operating expenses are expected to rise 2-4%, a meaningful deceleration from historical trends. Jen Dardis anticipates Q4 will see increases in long-term incentive compensation and seasonal advertising expenses, but these won't carry into the Q1 2026 run rate. The explicit target of low-single-digit controllable expense growth in 2026 and 2027 signals a structural shift toward efficiency, funded by the workforce reduction and real estate optimization.

Flow guidance has become more cautious. Rob Sharps stated that Q4 2025 flows look "weaker at the margin," with October resembling August's weakness more than July or September's strength. The primary driver is higher equity redemptions due to rebalancing after strong market returns and continued passive share gains from concentration in mega-cap growth sectors. While leading indicators suggest second-half outflows will be lower than first-half levels, management acknowledges that "it's unlikely" the company returns to positive flows in 2025. Organic growth is essential for long-term success—"I don't think that you can exist in perpetuity with a declining base of AUM," Sharps noted.

The strategic timeline extends into 2026. The Goldman Sachs collaboration will launch its first model portfolio before year-end 2025, with the co-branded target date series, multi-asset public-private solutions, and managed account platform following by mid-2026. The ETF pipeline includes over a dozen unfiled products for 2026, aiming to cover 75% of the Morningstar AUM universe. OHA's $6 billion in Q3 commitments will convert to fee-bearing AUM as deployed. The market must wait 12-18 months to see material revenue impact from these initiatives, creating execution risk if market conditions deteriorate or competitive pressure intensifies.

Management's tone reflects realism about the challenges. Eric Veiel described the market environment since November 2024 as "very narrow," where "quality and value have been the worst performing factors" and "the riskiest quintile of stocks have been the best performers." This environment is "not particularly conducive to our longer-term investment approach," explaining why performance-based fees collapsed 42% to $23.2 million in the nine months ended September 2025. The company is leaning into AI for productivity gains and alpha generation, but this remains an investment phase rather than a revenue driver.

Risks and Asymmetries

The most material risk is that fee compression accelerates beyond management's 2% assumption. If passive share gains intensify or competitors engage in sharper price competition, the effective fee rate could decline faster than expense savings accrue, leading to operating leverage working in reverse. This risk is particularly acute in target date trusts and blend series, which are growing but carry lower fees than legacy equity funds. The Goldman partnership could exacerbate this if co-branded products require fee sharing that further dilutes the rate.

Active equity outflows represent a self-reinforcing risk. Five consecutive years of net outflows create a negative feedback loop where declining AUM reduces revenue, pressures margins, and may force further cost cuts that impair investment capabilities. If performance doesn't improve in the current narrow market environment, outflows could accelerate, particularly in institutional channels where consultants have heightened sensitivity to underperformance. The company's own guidance acknowledges Q4 weakness, suggesting this risk is immediate.

The ETF business faces scale and competitive risks. While $19 billion AUM and 1.5% market share represent impressive growth from a standing start, the active ETF market is becoming crowded. BlackRock, Invesco, and Franklin Resources are all expanding active ETF lineups with deeper distribution and lower costs. If T. Rowe Price can't scale its ETF business beyond the current pace, it won't offset mutual fund outflows fast enough to stabilize total AUM. The filing of eight new ETFs, including lower-fee core equity products, suggests management recognizes the need to compete on price, but this may further pressure the blended fee rate.

Execution risk on the Goldman Sachs partnership is significant. The collaboration involves complex product development, technology integration, and coordinated distribution across multiple channels. If launch timelines slip or initial products fail to gain traction, the anticipated $1 billion Goldman equity investment and associated revenue synergies may not materialize. The partnership's economics are described as "balanced and equitable," but the details remain undisclosed, creating uncertainty about profit sharing and capital allocation.

On the positive side, an asymmetry exists if the company can stabilize flows sooner than expected. Improved investment performance in a broadening market, successful penetration of Goldman's wealth channels, or faster-than-anticipated scaling of OHA's private credit platform could drive AUM growth that leverages the newly controlled cost base, leading to margin expansion beyond current expectations. The 4.84% dividend yield and $4.3 billion cash position provide downside protection while this plays out.

Valuation Context

At $105.79 per share, T. Rowe Price trades at 11.5 times trailing earnings and 19.9 times free cash flow, significantly below direct competitors. BlackRock commands 27.7 times earnings, Franklin Resources 25.4 times, and Invesco 17.2 times. State Street trades at 12.9 times earnings but operates a different custody-heavy model. T. Rowe Price's enterprise value to EBITDA ratio of 7.2 times compares favorably to BlackRock's 18.8 times and Invesco's 9.5 times, suggesting the market is pricing in persistent headwinds.

The company's return on equity of 18.7% remains robust, exceeding BlackRock's 12.1% and Invesco's 6.9%, reflecting the profitability of its focused active management model. The dividend yield of 4.84% is the highest among the peer group, supported by a payout ratio of 55% and $4.3 billion in cash against minimal debt (debt-to-equity of 0.04). This financial strength provides strategic optionality for share repurchases, which totaled $484 million through September 2025—double the full-year 2023 level.

Valuation multiples imply the market expects mid-single-digit earnings growth at best, consistent with management's guidance for low-single-digit expense growth but continued revenue pressure from fee compression. The stock trades at 3.2 times sales, below BlackRock's 7.3 times and Franklin's 1.4 times, reflecting its mid-tier scale and active management focus. For investors, the key question is whether the strategic pivot can generate sufficient AUM growth to offset fee pressure, justifying a re-rating toward peer multiples. The current valuation appears to price in continued outflows but offers meaningful upside if the company can demonstrate even modest organic growth stabilization.

Conclusion

T. Rowe Price is executing a necessary and well-conceived strategic pivot, using aggressive expense management to self-fund investments in ETFs, alternatives, and distribution partnerships while its core active equity franchise faces structural headwinds. The expense reset—headcount down 4%, real estate charges taken, and guidance for low-single-digit cost growth—creates potential for margin inflection if revenue stabilizes. Early traction in ETFs ($19 billion AUM, doubling market share) and alternatives (OHA's $6 billion quarterly commitments) provides credible evidence that the strategy can work.

However, the central challenge remains unresolved: five consecutive years of net outflows in U.S. equities and accelerating fee compression to 39.1 basis points demonstrate that the legacy business continues to bleed. Management's cautious flow guidance, warning that Q4 looks "weaker at the margin" and that positive flows are "unlikely" in 2025, suggests the turnaround will be measured in years, not quarters. The Goldman Sachs partnership offers a powerful distribution catalyst, but revenue impact won't materialize until mid-2026 at the earliest.

For investors, T. Rowe Price presents a classic turnaround proposition. The 4.84% dividend yield and fortress balance sheet provide downside protection while the strategic pivot plays out. Valuation at 11.5 times earnings appears to price in continued deterioration, creating potential for significant upside if the company can stabilize flows and demonstrate even modest operating leverage. The critical variables to monitor are net flow trends, effective fee rate trajectory, and expense ratio evolution—if these metrics inflect positively, the margin repair thesis will have been validated. Until then, T. Rowe Price remains an active manager fighting for relevance in an increasingly passive world, with execution risk high and the timeline uncertain.