Unlike other industries, the asset management industry reacts rapidly to change. The advantage of making money from volatile financial markets is that you become used to your fortunes shifting over a matter of days.
That makes the industry adept at tightening its belt. With staff expenses the biggest item on the profit and loss account, headcount is often quickly reduced.
While shareholders might praise such a rapid reaction to a change in fortunes and margins being protected so zealously, such single-mindedness has its downsides.
Chat to any one in the industry and they will conjure up multiple anecdotes where ABC asset manager cut a product line or moved away from sustainable investing only to rebuild that business line or department few years later.
Bottom-line obsession
The problem with viewing a business exclusively through the prism of profit and loss is that it neglects the human impact of preserving the margin.
Not only does expertise and talent walk out of the door with such headcount reductions but the remaining staff become stressed and miserable.
Management will bang on about needing growth but often with little guidance on how to achieve that profit improvement.
With the remaining staff finding they are doing the work of least two people, they have little time or incentive to take the time to explore how to improve flows.
That leads to more staff turnover as people become demoralised and decide to try their chances either at another firm or running their own business.
Problems have mushroomed
The reliance of asset management on headcount reductions to solve business problems has always been the management tool of choice but it has become particularly pernicious in recent years.
As we have chronicled through this series of blog posts, the asset management sector has been battered in recent decades.
We have seen passive managers eating the lunch of active managers, the global financial crisis, fixed income becoming uninvestable, the rise of private assets and fixed income becoming investable again.
At the same time as these myriad financial market challenges, the UK institutional client base has also changed.
We have seen the closing of defined benefit pensions, the introduction of auto-enrolment, the rise of the master trust, the emergence of the LGPS pool and now the buy-out versus run-on debate.
All this change has created one clear directional trend for asset managers – flows are not flowing they way they used to and efforts to protect profit margins are failing.
Headcount continues to be cut and managers say growth will be rewarded yet still give little clue as to how to achieve this.
Change brings opportunity
The asset management industry needs to do something different. Rather than being solely focused on the margins, it is time to take a step back and focus on how clients are changing.
As we have said in earlier blog posts, there is lots of change in the UK institutional market but there is also plenty of opportunity.
We are on the cusp of a golden age for those asset mangers who grasp that we are moving out of the era of the transaction and into the age of collaboration.
Scale and evolution are changing the nature of the relationship between asset managers and owners from one reliant on being on a consultants’ buy list to deep relationship which could last for years.
For those asset managers who understand the risk of replicating the same play book from previous decades and comprehend the need for a radical re-focus on client need, the future looks bright.