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Tuesday, July 02, 2019

Asset Managers' Noncompensation Costs Are Rising

Reported by InvestmentWires Staff, 

Noncompensation expenses in 2018 were higher than years prior, new findings from Casey Quirk and McLagan show.

According to asset management strategy consultancy firm Casey Quirk, this noncompensation expense growth spells bad news for the asset management industry as a whole. Despite growth in AUA, from $68.3 trillion in 2017 to $71.8 trillion in 2018, operating margins fell from 34 percent in 2017 to 32 percent in 2018.

Noncompensation costs — including things such as regulatory, processing, technological, and office-space costs— are taking up a larger percentage of total costs than in previous years. Where they were 26 percent in 2014, they rose to 30 percent in 2018. Casey Quirk attributes the margin erosion that asset managers are facing to these noncompensation costs, along with rising compensation expenses. Indeed, the average cost of managing a dollar of AUMhas increased by 4 percent since 2014.

"Cost growth has outpaced revenue growth in three of the past five years, putting pressure on industry margins," Amanda Walters, senior manager at Casey Quirk, tells MFWire. "The rise on non-compensation costs is impactful, particularly in a more challenged economic environment, because costs to support the business are growing."

"It's important to note that both compensation and non-compensation related costs are rising, albeit at different rates on different cost based levels, with overall industry cost growth of about five percent in 2018," Walters adds. "Pay and headcount are at record highs."

When it comes to tackling these rising costs, especially rising non-compensation costs, Walter urges fundsters to: 1) "optimize team structures" by doing things like "delaying/eliminating high paid underperformers and moving teams resources to lower cost locations"; 2) making sure to "streamline data and technology"; and 3) focusing on "process improvement" by, for example, finding "areas that are ripe for automation" and optimizing "process flow design."

"We estimate that delayering and comp realignment ... yield the biggest savings opportunity for a given firm," Walters says. 

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