Wisdom of independence
In the aftermath of the 2008 financial crisis, independent US asset managers have increased their revenues and profitability more than the asset-management subsidiaries of the larger US financial institutions. Publicly traded asset managers posted median profitability of 35% last year, compared with 25% for subsidiaries, and grew revenues 15% during 2011, compared with 6% for subsidiaries, according to recent analysis from Casey, Quirk & Associate, a consultant to the global asset management industry.
The study looked at 21 publicly traded US-based asset management firms - such as BlackRock, Franklin Templeton Investments, GAMCO Investors, Janus Capital Group, Legg Mason, State Street - along with the asset management subsidiaries of 12 quoted US financial institutions, from Goldman Sachs to Lazard, JP Morgan Chase and Morgan Stanley. For the whole sample of 33 firms, median annual revenue growth rose only 8% in 2011, compared with the 22% increase in 2010, with the median operating profit margin stable at around 27% for both 2010 and 2011.
“The trend among private firms is the same as the publicly traded independent asset managers”, says Casey Quirk’s Jeb B. Doggett.
“In the asset management industry the most important driver of revenue growth is what happens in capital markets. The latter have performed quite well in 2010-11 and so revenues have increased in both years,” explains Doggett. “Instead, profits margins have remained flat at around 27%, but with important differences between independent asset managers on one hand and financial groups’ subsidiaries on the other hand.”
The main reason is the way employees are treated according to Doggett: “Independent firms have a strong ability to attract and retain talented investment professionals. In particular, private organisations tend to offer long-term incentives that are more directly tied to the assets’ performance, while in subsidiaries the managers’ compensation usually consists of stocks of the parent company that can be less desirable during market turmoil - especially after the 2008 financial crisis, which has put a lot of pressure on larger institutions to cut costs. Because of that, we’ve seen some of the best people in the asset management industry leaving financial conglomerates and going to smaller independent organisations”.
Private companies can reward individuals with equity that pays dividends and which can also be exchanged in a private internal market: “This compensation system is much more stable and so more appealing to the investment professionals,” comments Doggett. “Private companies don’t feel the pressure of Wall Street for quarterly results, so even during a crisis as deep as the 2008 one, they react to the market with a longer view, not necessarily with a head count reduction but, on the contrary, trying to keep people together. Theirs is also a system that better aligns employees’ interests with those of the clients for long-term success”.
In the asset management industry, performance is critical. “But it’s easy to focus on near-term results,” warns Doggett. “A firm is successful if it attracts and retains clients in the long term, and that goes together with attracting and retaining talent. In the large financial groups’ subsidiaries, the asset management is usually a small part of the whole business: the stock options’ value for the professionals has a less direct link to their performance, and the annual bonus is more important. Independent companies have more flexibility to devise long-term compensation schemes that reward real value creation. Over time, this different approach seems to have given independent firms an edge. The 2008 financial crisis helped magnify the differences, because it had a more dramatic impact on big corporations that rushed to cut costs, thinking they would hire people back when needed”.
Competing hard for top-level talent with compensation plans that reward long-term performance, rather than immediate gains, is one of the challenges facing the US asset management industry today, according to a new report by PricewaterhouseCoopers.