Pension Issues Create Need for Talent in Asset Management

December 5, 2006 ( - A report from executive search firm Russell Reynolds & Associates indicates the impact of pension reform, increased interest in liability-driven investing, and a heightened awareness of fiduciary responsibility has made the chief investment officer (CIO) role of plan sponsors, endowments and foundations more difficult and more complex.

This had led many organizations with $1 billion in investable assets to create CIO roles and a true investment function for the first time, Russell Reynolds said.

According to the report, plan sponsors, endowments and foundations are seeking more experienced CIOs who will be held to deliver on measurable metrics.   These CIOs continue to demand and receive higher compensation than the industry has paid historically and Russell Reynolds found upward pressure for CIO compensation continued in 2006.

The separation of alpha and beta by many of the largest, most sophisticated plan sponsors, endowments, and foundations has had a material impact on recruitment, the report said.   The practice has heightened the demand for broad-based investment professionals who are capable of constructing portfolios spanning traditional, alternative and capital markets/derivatives products.

In addition, Russell Reynolds found, plan sponsors, endowments and foundations are driving current investment thinking away from a constrained style box framework.The growing participation of institutional investors, especially pension funds, in hedge funds has brought a greater degree of review and scrutiny of hedge fund operations – not only their investment process, but their staffing and business management procedures, according to the report.

Also, the recent passage of the Pension Protection Act of 2006, as well as the willingness of the aging baby boomer generation to pay a premium for expertise, has fueled an increase in post-retirement advice and guidance.   Increased service offerings are coupled with more sophisticated product lines such as annuity wraps on managed accounts and other structured products, the report said – reawakening the recently dormant market for US retail distribution talent.

As a result, according to Russell Reynolds, most firms in the US retail distribution market will see compensation for senior executives rise by 20% or more in the coming year, and second-year guarantees that increase total compensation by 25% to 50% are now common.

The higher expectations of fiduciaries such as the ability to understand the intricacies of the Employee Retirement Income Security Act (ERISA), navigate the liability side of the balance sheet, and handle the operational aspects of plan administration have pushed compensation of those employed by corporate plans up also.   Many corporations offer equity as part of the total package, Russell Reynolds found.

Public funds, with a few notable exceptions, continue to trail in compensation, with many only offering a low base salary and no bonus opportunity, the report said.

US investment management firms saw recruitment of individual equity portfolio managers and teams remain very strong in 2006, with demand highest for value-oriented, international and quantitative investors with a track record putting them in the top quartile - or even the top 10%, according to the Russell Reynolds report. The year also saw an increase in demand for mutual fund managers after a couple of slower years in that area.

Top alpha generating firms were tempted by hedge funds and many equity shops are adding alternative investments to their mix, according to the report, resulting in more demand for professionals in this area.

Compensation remained steady and pay-for-performance remained the top strategy for US investment management firms. Russell Reynolds anticipates team hiring will remain high and demand for equity growth portfolio managers will increase.

Overall, recruiting activity in fixed income was down approximately 15% from 2005, with the biggest decline in investment grade, due to slowing economic growth and investor concern over housing and energy prices.

Other Trends

The report highlighted other trends in asset and wealth management sectors including:

  • Lines are being blurred between traditional and alternative equity offerings. This convergence has
    meant an increasing demand for IT programmers and accountants.
  • Real estate showed double digit returns in 2006. As a result, the demand for talent rose causing a limited executive supply. This resulted in rising compensation and bonus pools up to around 15% - 20%.
  • Due to a new generation of high net worth clients from around the world, the demand for professionals who have an understanding of the local culture and network is forcing many firms have to seek affordable candidates from outside the usual talent pools.
  • Succession planning is now at the fore. Compensation has played a key role in this with firms restructuring packages to offer restricted stock grants, longer vesting periods and more restrictive non-compete and non-solicitation clauses.
  • Competition remained intense for the most experienced Risk Managers. Compensation remained high - up 25% in 2006.
  • Investors' expectations for better client service has resulted in increased market demand for investor relations professionals.

Russell Reynolds can be found on the Web at .