Market Turmoil Causes Major Asset Manager Cost Cuts

A Greenwich Associates news release said money managers are slashing costs by an average of 22% as the value of their assets plummeted an average 31% during 2008.

According to the announcement, each of the 47 U.S. asset management CEOs, COOs, and CFOs participating in Greenwich’s December survey said their firms experienced asset declines in 2008 – ranging from 2% to a nearly 67%. Small firms have been particularly hard hit due to deteriorating economies of scale, but even large firms have been forced to minimize costs.

This performance has had a significant impact on manager revenues: Investment managers are projecting an average revenue decline of almost 33% from 2007 levels by the end of 2009. Some of the worst hit firms expect 2009 revenues to decline more than 43% from 2007 levels.

“Instead of cutting costs in line with revenues to reach ‘normal’ profitability, most firms are trying to position themselves for a rebound in the markets and cutting less in client-facing and investment areas,” said Greenwich Associates consultant Goran Hagegard, in the announcement. “This effectively means accepting lower margins in the short-term. Firms project operating margins to fall an average of 37% in 2009 from their 2007 levels.”

Cutting Costs

Most managers are targeting non-investment departments with cost cuts, according to the report. Approximately three quarters of the firms cutting costs are targeting support services and/or investment operations, and about two thirds are targeting distribution and client services and/or information technology.

Key to managers’ cost reduction efforts will be an average 29% reduction in bonus expense from 2007 to 2008. In addition, about half the firms surveyed said they are reducing headcount by an average of nearly 11%.

The U.S. asset management firms participating in the Greenwich Associates survey together represent approximately $3.2 trillion in assets under management. Thirty two percent have assets under $10 billion, 47% have assets of $10 billion to $100 billion, and 21% have assets greater than $100 billion.