Europe's asset-management industry is immensely profitable and larger than ever. But while its long-term growth prospects remain healthy, the financial-market setback that started in mid-2007 will probably dent its fortunes in the short term. Given the industry's inflexible cost structures, its heavy dependence on capital market performance, and early signs that investors may switch to cash or other low-risk alternatives, its 2008 profits could be dramatically lower.

A new McKinsey survey, based on interviews and data collected in early to mid-2007, finds that in 2006, the latest year for which data are available, total assets exceeded €10 trillion for the first time and that total profits surpassed the record set in 2000, at the height of the dot-com boom. Still, the intake of new money (as opposed to gains from market appreciation) rose more slowly than it did in previous years, and costs climbed at a faster pace than assets, eradicating the cost improvements of 2005.

Since 1998, McKinsey has surveyed European asset managers to measure the pulse of their cyclical industry. This time we questioned managers at 118 companies that together hold €6.5 trillion of assets under management for a mix of retail and institutional investors. Collectively, our respondents...