Standard Life and Aberdeen Asset Management have agreed terms for an all-share merger.
The proposed deal, recommended by both boards, would create a group with £660bn in assets and the largest UK asset manager overtaking Schroders at £386bn.
It comes after more than three years of redemptions from Aberdeen's funds due to weaker sentiment toward emerging markets.
Standard Life’s investment unit also had outflows last year.
Keith Baird, financial services analyst at Cantor Fitzgerald, sees the merger as a defensive and cost driven deal given the threat from passive investing, pricing and regulation.
“Standard Life has had success in growing its institutional business but has problems with GARS and mature insurance books.
“Aberdeen has a large emerging markets business which has struggled.
"The fit between the two businesses looks reasonably complementary but there will be a risk of revenue and staff attrition to offset savings on costs."
Justin Bates, analyst at broker Liberum, added that Aberdeen AM has been reviewing options for “some time”.
“While it has endured over four years of net outflows (£100.1bn), it remains a major player. We do not rule out interest from elsewhere.
"Brand and scale are all important," Bates added. "If this merger is successful, we would see it as a spring board, from a position of enhanced strength, to embark on further deals, possibly US."
Standard Life has a market value of £7.48bn and Aberdeen £3.77bn, with £11.3bn combined.
Both firms said the deal is subject to a number of conditions, including shareholder approval.
The combined group will be named to incorporate the names of both Standard Life and Aberdeen.
Following completion, Aberdeen shareholders will own about a third of the company, with Standard Life shareholders owning the rest.