Layoffs, Bonus Cuts Part of Morphing Asset Management Industry

If expenses are not cut significantly, asset management profits face a serious decline, and the largest sources of potential expense reduction are incentive pools and headcount, according to a report.

Compensation consultant McLagan and management consultant Casey, Quirk & Associates say in their whitepaper that asset management company operating profits are likely to decline by an average of 35% in 2008, and could see a further decline of 35% in 2009, if expenses are not reduced.

For 2008, the consultants assume all operating expenses will be in line with 2007 levels, except for cash bonuses and long-term incentive grants, which they estimate will be cut by 25%. For 2009, the consultants assume there will be 20% expense reductions in discretionary operating expenses, such as marketing, technology, and travel and entertainment. The report said pay practices are more difficult to predict as some firms are more likely to focus on cutting headcount, while others are more likely to focus on reducing bonus pools.

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According to the whitepaper, changes in compensation and benefits—the largest expenses for asset management companies, usually accounting for 40-60% of revenues —have the greatest impact on profitability. The consultants modeled potential tradeoffs between reductions in incentive compensation and reductions in headcount and found that if headcount and incentive spend remained flat between 2008 and 2009, then operating profit margins would decline by over 5%, from an average of about 28% of net revenues in 2008 to 22% of net revenues in 2009.

To restore 2009 profit margins to 2008 levels through compensation-related spending cuts, the report said, the average firm will likely have to slash incentive spending by more than 20% and headcount by more than 10%. In addition, the consultants said they believe further industry layoffs will be required, and in many firms, these cuts will be added to, and far exceed, the 10% staffing reductions that already started during the fourth quarter of 2008.Specialty equity-oriented firms are likely to see the worst top-line compression, the consultants anticipate, with their revenues potentially falling by 40% between 2007 and 2009. Their average operating profit margins could drop from 39% in 2007 to 18% in 2009.

Not all firms will endure the same financial pressure during the adverse market, according to the report, “Crisis in Asset Management: Industry Profitability Under Siege.” Equity-focused firms will be under greater pressure than fixed income-focused firms, and mutual fund-focused firms could face the “double whammy” of declining markets and significant redemptions from retail investors, the report said.

The consultants forecast that the revenues of the more globalized firms, which typically have the most diversified business and product mix, will decline the least, sliding about 25% between 2007 and 2009. Meanwhile, the report said multi-capability firms, which offer a broad product array and serve multiple distribution channels but are not yet global, will suffer the most financial pressure.

Typically carrying the burdens of subscale products, distribution or both, these firms already have operating profit margins that trailed industry norms, and without significant reduction in compensation and benefit expense, the consultants anticipate these firms’ operating profit margins will decline from 25% in 2007 to 13% in 2009.

To 2028: The Boomer Odyssey

As the global economy evolves, so is the financial outlook for Baby Boomers.

Baby Boomers might redefine themselves and their surroundings by the year 2028 as a result of an evolving global environment and marketplace, according to a project by the Institute for the Future in conjunction with the MetLife Mature Market Institute.

The project’s final report, “Boomers: The Next 20 Years, Ecologies of Risk,” paints a new picture of the Boomer demographic as it confronts a longer lifespan, the widest rich-poor gap in recent generations, a global energy shortage, new economic realities, and a Web-based infrastructure, according to a press release. The report concludes that Boomers will be resourceful and self-reliant, forming economic, health, and social collectives—and families of choice—to adapt to the future.

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According to the report, Boomers will distribute the stress and burden of managing risk across networks of people, some based on kinship and others on affinity or interest. They will plan more, work longer, and become more entrepreneurial, as well as take part in peer-to-peer networks of people that will perform some of the financial services that banks and other financial institutions perform today.

Money Matters

The groups noted that Boomers will be the first generation to age in a truly global economy, giving them access to more learning resources, new ways to collaborate, financial products from around the world, and health care abroad (“medical tourism”).

In addition, the report suggests that an erosion of the trust people have had in institutions will bring new banking/investment vehicles, peer-to-peer loans, and new structures to manage new capitals. Financial security will be threatened by diminished government and employer safety nets and low personal savings.

Relationships Redefined

“Boomers: The Next 20 Years, Ecologies of Risk” projects emerging patterns of marriage, remarriage and childbearing, including alternative chosen family arrangements, will change the definition of family. There will be peer caretaking and social care matching services, the report said.

In addition, the report suggests greater distance between family members and greater responsibility for the financial well-being of children and grandchildren will contribute to slowed personal wealth accumulation.

Boomers will use new ways to build communities to close the gap created by decreased mobility, polarization, social fragmentation, and health challenges such as online social networks, virtual retirement communities, and community blogging. Challenges they will face include elder abuse, anti-boomer backlash, and ageist zoning laws.

Degradation of the environment will bring risks from new diseases and fewer sustainable food and energy sources resulting in food and energy collectives, do-it-yourself (DIY) products, and green technology.

Boomers will live longer, but will suffer from new chronic diseases and widespread depression from aging, illness, and other concerns. They will manage their health differently with biometrics and online tools that will challenge privacy, but will allow them to share and benefit from new information found on all parts of the globe.

Developed through ethnographic profiling of a diverse group of those born between 1946 and 1964, “Boomers: The Next 20 Years, Ecologies of Risk” is the result of a three-phased project of how Baby Boomers will age over the coming decades. The first phase mapped boomers’ 20-year horizon, identifying seven big stories that will shape their future (the Boomer map). The second phase consisted of interviews with boomers to define the 10 “Action Types’ showing how different Boomers will make different choices as they confront the challenges of the future. The final phase, “Ecologies of Risk,’ uses these insights to create focused forecasts of the boomers’ world.

Six organizations, including major corporations and the AARP, were involved in the project. To download a copy of “Boomers: The Next 20 Years, Ecologies of Risk’ and the Boomer map, visit www.maturemarketinstitute.com, and go to “What’s New.’

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