Of course money managers, like everyone else, have been forced to cut costs in these tough times. But how? Take clients out for pizza? (ouch) Take the subway? (oh no!)
Actually, most firms have taken steps pretty close to that, according to Boston Consulting Group’s eighth annual study of the global asset management industry, released this summer. The 100 managers of all sizes, locations, and specialties that provided data to the survey said they trimmed their costs by an average of 7 percent last year. They did it largely by what Chicago-based partner Brett Beardsley, in an interview with Institutional Investor, called “picking at low-hanging fruit that doesn’t get into the fundamental core of the business.” For instance, they suspended or eliminated free parking and free lunches. Beardsley says these kinds of actions can slice 4 to 5 percent off a firm’s cost base.
However, at a time when clients are switching to lower-fee, lower-risk investments like bonds, and net revenues have fallen 11 percent, according to the survey, such tiny penny-pinching isn’t enough.
About half the managers surveyed – primarily larger firms – took more serious actions, including consolidating and outsourcing back-office functions. This can contribute a further 7 to 10 percent in savings, Beardsley says.
Hmm: Three percent plus 7 percent .... This still may not cover the revenue loss. So what else can be done?
Obviously, with margins down 19 percent last year, many firms have been willing to accept lower profits rather than cut deeper. Indeed, with margins of around 31 to 35 percent, “this is still a relatively high-margin business,” Beardsley points out. Yet it’s also a business where professional employees expect high pay, and that demands a certain level of profits.
Another option is to do nothing. “A lot of managers are treading water, hoping things get better,” Beardsley says, They have put away their paring knives, and “a minority” even have their wallets open, ready to spend at the first sign of hope.
Maybe that strategy will work. But the real answer, Beardsley says, has to lie in making the kinds of cuts that hurt: Getting out of high-overhead asset classes or geographic regions or shedding less-profitable types of clients. Firms that do this “are making strategic decisions,” he says. “They recognize that they’re at a competitive disadvantage, and they’re likely never going to be successful there.” These sorts of moves can save a significant amount – 15 to 20 percent off costs – via lower overhead.
Beardsley says midsize firms in particular should consider this route, because for some products, clients, and markets – say, to set up an office in Japan or run emerging markets equities – “there’s a minimum scale you need” He adds, “ Midsize firms recognize they couldn’t be all things to all people.”
Such drastic steps are tough, however, and only about 20 percent of the survey respondents had taken them. “A lot of managers want to save options. They believe, ‘Eventually we can be successful here,’ “ Beardsley says.
The industry can’t afford such wishful thinking any more, he warns. “We’re not going to return to 2007 any time soon,” he says. “You need to really assess where you’re advantaged and place your bets there.”
Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.
