The downturn in the fund industry can be seen in the latest earnings reports. The prime example was provided at the end of last week by Franklin Resources. The firm revealed a hiring freeze, hinted at a planned decline in marketing spending and, most drastically, announced a cut in salary for existing workers.

This is not a good Halloween for 6,800 Franklin employees. Starting Thursday (November 1), employees will see their paychecks shrink by 5 or 10 percent depending on their base pay, Martin Flanagan, Franklin's chief financial officer told analysts. Some of the pain may be offset by $9 million in retention bonuses that the firm accelerated after the September 11 terrorist attacks.

The pay cuts are expected to save the firm some $15 million in annual payroll expenses. Altogether, Flanagan said the firm will save up to $50 million, or 1.5 percent of revenues, by also cutting use of temporary workers, freezing its headcount, limiting overtime and reviewing travel and entertainment expenses.

"We are in no net new hires... but we are trying to be very wise and smart about making sure that we have the areas that have opportunities and growth appropriately staffed," Flanagan explained. He added that the current freeze is different than the across-the-board cuts the firm made in 1998. Flanagan explained that the firm is trying to shift existing personnel to growth areas rather than add new executives.

Management also said that the firm will be aggressive in "counseling out" underperformers and that the firm will hire to replace employees but will not add to its headcount.

Workers will suffer the cuts for at least the next six months. Senior management will review the cuts in six months and make judgments based on both the state of the economy and the firm's operating results.

Flanagan also hinted that the firm will cut its marketing efforts after boosting them so far this year.

The firm had upped its advertising promotion by 19 percent from last quarter to "fully communicate with sales channels and investors to make them aware of our very investment performance across all of he brands," said Flanagan.

"We feel very strongly that this was the right strategy prior to September 11, and going forward we will continue to spend opportunistically, but you should not look at this last quarter as indicative of levels in quarters going forward in light of the very difficult market."

He later revealed that advertising spending will "revert closer" to 6 to 7 percent of operating revenues that has been more traditional for Franklin.

"The level of spending was very unusual," explained Greg Johnson, president, in response to a question asking why the firm was cutting its advertising budget. Johnson said that the firm made a strategic decision when it saw a disconnect between internal and external perceptions of performance after a survey of broker-dealers. The goal of the advertising campaign was to change that perception.

"We are not going to cut back to the point where you do not see Franklin-Templeton in the magazines and the Journal," Johnson added. "That issue of performance has been changed with the key-customers," he said noting that the firm will return to spending on visibility. What will be cut are full-page ads and spending on network television.

The downturn comes at an ironic time for Franklin, as its value investing focus as pushed a number of its products to the top of Lipper's rankings. The firm's products had been laggards during the go-go growth market of the late Nineties. Franklin had been aggressively promoting this turnaround in performance, but it now appears the firm will be restricted just as it has the performance to boast about.  

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