Among the many challenges currently facing the investment management industry, the most critical ones, in my view, are dealing with the ever growing impact of regulation; maximising key strengths; identifying which parts of the business can potentially be outsourced; positioning the company in the expected wave of further consolidation; and recognising the return of the 'star-manager'.
Globally regulation has become a key issue for the industry, nowhere more so than in the US which has faced a barrage of criticism. Across Europe the ever increasing impact of the regulators, both at an EU and national level, is having a growing impact on the corporate bottom-line. At the last count there were around 30 pieces of legislation emanating from the EU's Financial Services Action Plan which would impact the industry, with companies having to resource up and recruit in the areas of compliance and risk management just to keep up with real business issues arising from the numerous consultation papers.
The industry needs to collectively respond, both corporately and through empowered trade associations, to make its voice heard above other pressure groups. The industry's current response to more regulation being imposed is, at best, fragmented. Just as the sector appears to be improving profitability levels, it will be hit hard by the increasing cost of just remaining compliant.
Managers need to be continually reassessing the strength of the business and in particular their core-competencies in the light of the trend of greater outsourcing opportunities. With a whole range of new entrants, including traditional competitors offering outsourcing services right across the value-chain, business leaders must not be overly wedded to the more traditional parts of their business that could be outsourced. Significant care needs to be taken when selecting a potential outsourcing partner, not just in terms of their current capacity and expanding client list but also the way they deal with a potential exit strategy for both sides if the relationship does not run the course. Also the cost equation is complex and needs careful evaluation.
For many outsourcing will deliver cost savings but managers also need to concentrate on revenue generation at this stage of the cycle. In discussions with CEOs, many have expressed frustration at not having real quality, reliable data. This time last year everyone was suggesting that profitability was more important than assets under management. However, with major global indices up over 20% during the last year, there appears to be a swing back towards managers promoting themselves by size of assets rather than profitability. CEOs still need to invest time and money into top class management information systems enabling them to measure costs, revenue and profitability by product, distribution channel and geographical region.
Strategic positioning in the context of the local and global market, and relative distribution arrangements, need to be considered as the likelihood of further consolidation in the mid-range firms is clear; some analysts are predicting we will see a further round of acquisitions by the major global players now they have had time to digest the mega-deals from the late 1990s. However, different regions appear to be moving faster than others, with corporate activity much more evident in the US. This is perhaps due to a lower cost base and a more fragmented ownership structure, in comparison with continental Europe which appears much more hesitant to undertake mergers - apart from the ‘stressed-sales’ seen in recent months by parent companies who either require liquid assets or have decided that asset management is no longer a core-competency.
Managers need to have clarity, from a business development perspective, around which markets are crucial to them and a focused underlying segmentation strategy to achieve a first-mover advantage when an acquisition opportunity presents itself.
The much heralded return of the 'star-manager' could be upon us with some CEOs expressing a strong interest in having best-of-breed in all product areas - very costly to develop from scratch and even more difficult to manage on-going in a ‘big-company’ culture. CEOs will have to decide if they wish to create a star-manager or team based operating model with the appropriate compensation structures. Although a difficult nettle to grasp, leaders will have to develop innovative compensation models that reflect the true add-value of individuals and their teams, rather than rely on the past discretionary element of bonus payments.
As markets have recovered from last year's lows, CEOs have been offered a breathing space to start to act less tactically and more strategically. The winners are likely to be the ones that recognise that the underlying issues facing the industry still need to be addressed, and that the recent increase in profitability does not necessarily herald the return of the boom scenario seen in the 1990s.
Neil Fatharly is global industry manager in KPMG’s investment management and funds practice firstname.lastname@example.org