41% of the investment management industry in the red

The investment management industry has been through some of the toughest times in its modern history. As a result, recent research indicates that 41% of the entire industry is operating with cost rates at or above 99%, which basically means that they are currently not profitable. Only 19% of companies surveyed operate with cost rates of less than 85%. Financial top performers in the industry tend to pursue structured cost reduction methodologies such as Business Process Improvement (BPI) or Lean Six Sigma.
by Lars Falkenberg, SimCorp StrategyLab and Professor Michael Pinedo, Stern School of Business, NYU

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The Global Investment Management Cost Survey 2009, carried out by SimCorp StrategyLab , reveals that as a direct reflection of the pressure on profit in the industry 72% of the companies surveyed claim that cost management has gained increased strategic importance. Only 20% of those surveyed state that cost management’s strategic importance is the same as always.

Further, 43% of all investment firms surveyed have been through cost-cutting projects over the last two years. Of those having undergone cost-cutting projects, 55% have been targeting cost of labour and 32% have been looking to reduce transaction life cycle cost. The level of reduction sought varies significantly when adjusting for investment management firm type. Topping cost-cutting ambitions, companies working in fund distribution have been looking to cut up to 15% of their costs across the board, including labour and other operational costs.

Of all companies surveyed, only 41% on average have been able to sustain the achieved cost reductions for more than a 12 month period.

A general perception across the industry seems to be that automation of processes is the most important cost-cutting strategy over the coming three years’ period (41%). This is supported by an average of 46% who think that increased cost efficiency, greater process efficiency and greater operational efficiency through automation will be important aspects of cost management in the future.

71% of those surveyed think that increased competition will increase pressure to rethink cost structures in their organisations as well as regulatory changes (66%) and pressure from shareholders and investors (61%).

According to the results of the survey, top performers in terms of ability to generate profit (i.e. those with cost rates below 85%) seem to review their cost structure every six months, and they use BPI or Lean Six Sigma as cost reduction methodologies. Further, they pursue an active equity or multi-boutique investment strategy as well as make use of external consultants in their cost reduction projects. Also, the typical duration of cost reduction projects seems to be 7–12 months in these firms.

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Short-term tactical versus long-term strategic cost management

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About the Global Investment Management Cost Survey 2009

  • The survey is based on 100 CATI interviews with respondents from around the world. Not all respondents answered all questions.
  • The specific interview distribution is 50 from Europe, 25 from the United States and 25 from the Asia-Pacific region.
  • Respondents were randomly selected from industry databases, and interviews were completed after confirmation of meeting screening criteria.
  • Only one contact person per company was interviewed.
  • The questionnaire was created by SimCorp StrategyLab and was examined by The Nielsen Company prior to fieldwork.
  • The SimCorp StrategyLab was not revealed as the client behind the study unless prompted by the respondent.
  • All respondent answers are anonymous unless they specifically agreed to have their answers reviewed.
  • 50% of the respondents use direct distribution channels, while 27% use indirect distribution channels and 23% work with another type of distribution channel.
  • Most (36%) of companies interviewed have operations in 1 location, 22% in 2–3 locations, 14% in 4–6 locations and 28% in 7 or more locations.