Shares in the business tumbled more than 9% at the market open to 353p, the lowest in the group's six-month history as a traded company, before recovering to 370p, 4.7% lower on the day, by 9.46AM.
The contract represented a substantial chunk of the £646.2 billion which the group reported managing at the end of last year.
The cash was run within the company following the Aberdeen group’s 2013 acquisition of Scottish Widows, which was hailed at the time as creating a key strategic partnership for the business.
‘We will be discussing the implications of this with LBG [Lloyds Banking Group] and Scottish Widows,’ said Aberdeen Standard Life co-chief executives Keith Skeoch and Martin Gilbert (pictured) in a statement.
‘We are disappointed by this decision in the context of the strong performance and good service we have delivered for LBG, Scottish Widows and their customers.’
The company said that the management fee it received on the funds was ‘less than 5%’ of 2017 revenue. It has taken a £40 million impairment charge to its books.
Funds held within the contract had already fallen from £136 billion at the time of the original 2013 deal.
In the lead up to last year’s merger of Standard Life and Aberdeen Lloyds delayed its decision on the fate of the assets and had been due to make a public statement by the end of this month. The company will now serve out a 12-month notice period.
Chief executive of Scottish Widows and Standard Life Aberdeen group head of insurance and wealth Antonio Lorenzo said that last year's merger had meant the funds were now run by a business with a private client division - Standard Life Wealth - in direct competition with parts of Lloyds.
'Given the merger of Standard Life and Aberdeen has resulted in our assets being managed by a material competitor, it is now appropriate to review our long-term asset management arrangements to ensure they remain up-to-date and that customers continue to receive good service and investment performance.
'Therefore, we will begin an in-depth assessment of the market to identify a long-term strategic partner, or partners, to manage the current £109 billion of assets.'
Hargreaves Lansdown senior analyst Laith Khalaf said that while the loss was a 'sour note' for the business and the rationale for its merger, the assets were among the combined group's lower-margin mandates.
'It’s also worth noting the sort of funds involved are not run by the star managers of the stable, rather they are the sort of strategies that feature in older pension contracts sold under the Scottish Widows banner,' he added.
'There’s a possibility Standard Life Aberdeen may retain this chunk of assets, subject to further negotiations. There’s also an outside chance Lloyds may look to rebuild its own investment management capabilities, as it launches a new three-year strategy next week.
'This would make some sense now the bank has recovered from the financial crisis and will be looking for opportunities to grow and diversify.
'However 12 months doesn’t give the bank a great deal of time to pull off such a big u-turn, having sold SWIP to Aberdeen only a few years ago, so this doesn’t look like a serious prospect for the time being.'