Almost unanimously our C-Suite clients have said, “This is one of the most challenging years since the 2009 recession.”
Asset managers with unique value propositions in product, service, or risk-adjusted returns, usually centered around less liquid and more opaque asset classes, or innovative product structures, continue to grow and thrive despite flat compensation expectations and slightly depressed revenues. Long-only managers in the vast middle ground are treading water and will significantly alter compensation downward to adjust for revenue shortfalls of 10% or more. The largest ‘40 Act mutual fund businesses will continue to experience multiple challenges that are well-documented and will likely spark accelerating consolidation.
Our C-Suite recruiting work has seen a considerable uptick in October and November of 2022 with demand from enterprises that are benefitting from continuing organic growth and asset flows, such as RIAs, ETFs, sustainable finance/ESG roles, and specialty asset classes such as renewable energy infrastructure, private credit, and AI-driven quant strategies, among others. We remain optimistic about the second phase of this broad market cycle through 2023. Although the risks of recession are considerable, the leveling off of global monetary policies and demand recovery in Asia is improving the risk appetite of asset and wealth management C-Suite executives.
Following a record year of growth and profitability across nearly the entire industry in 2021, firms began aggressively trimming bonus pool accruals in Q2 2022 in the face of broadly falling markets and considerable geopolitical uncertainty. This cutback followed a spike in turnover in 2021 that persisted into the first quarter of 2022. The conflicting messages of higher turnover and falling compensation negatively impacted executive confidence, almost irrespective of firms’ short-term economics or longer-term industry trends, leading to a broad softening of executive recruiting.
The silver lining for leadership teams is that the tougher messages on total compensation being down for 2022 is occurring simultaneously with decreasing recruiting work at competitors, slowing turnover considerably. The lack of the “bid away” by competitors, which many executives considering making a career change began to take for granted during the past two years, makes them less inclined to move despite the individual and collective disappointment in compensation. At the executive leadership level, this disappointment goes beyond falling total cash compensation and includes depressed equity values (most public pure-play asset manager stocks are down over 20% YTD), which is a significantly greater share of their total rewards. Interestingly, these depressed values in deferred compensation programs led executives to defer career change decisions, based on our experience.
Underlying these broad trends, and complicating executive compensation and recruiting decision-making for 2022 and 2023, is the wide variety of results across the asset and wealth management business. For example:
- The mutual fund segment has seen outflows approaching $1 trillion (based on data through Q3). Recruiting activity has been almost exclusively in the ETF, liquid alts, tech, ops, and client service areas. Compensation is expected to fall to a five-year low, with bonuses falling 50% in the poorer-performing firms.
- Within alternative investment firms, the disparity of flows and financial results has expanded back to 2009 levels, with renewable resource private equity seeing another record year, while tech-driven venture firms are experiencing collapsing valuations. The gap we have encountered among firms goes from bonus pools set to increase by as much as 15% to those experiencing decreases of as much as 20%.
- Despite equity and credit markets’ substantive declines, flows and margins at long-only firms with specialty asset classes such as emerging markets, alternative credit, real assets (ex-real estate), and unique active or thematic ETFs, have remained strong, sustaining continued recruiting demand for new initiatives, despite minor downward adjustments (1-3%) in overall headcount. Core long-only focused firms have seen significant outflows in combination with weak margins. The most successful of these firms will see bonus pools down 5% from 2021, while the weakest are planning bonus pool cuts of as much as 30%, depending on the outcome of Q4 results.
- In wealth management, RIAs with strong regional service brands and UHNW private banks remain in growth mode. At the same time, large national wirehouses have struggled, despite retail investors’ demand for more active advice. Many of these stronger firms are boutiques with a significant portion of their professional staff on revenue-sharing arrangements. In many cases, market declines have been offset by organic growth. Though revenues are expected to decline as much as 10%, the stronger firms will keep bonuses flat for top quartile performers, while the broader bonus pools will be down 10-20%.
These performance disparities lead to pockets of vulnerabilities where falling compensation will accelerate turnover at weaker firms, opening up opportunities for stronger firms to expand their product, channel, and regional footprint through recruiting and acquisitions at a far lower cost than was the case in 2020-2021.
In the fourth quarter, media coverage of staffing challenges in the asset and wealth management business has been chiefly focused on headcount changes of less than 2%, which is well within a normal healthy annual turnover range of 5%. Since there was some “labor hoarding” at lower and mid-levels at firms that had recruiting challenges in the past two years, the recent layoffs are not a significant indicator of future business intentions.
On the other hand, the trends at the largest banks and diversified financial services firms to adjust headcount downward by over 5% to match lower revenues in retail and institutional products due to higher interest rates and a slowing macroeconomic scenario are appropriate. They have some negative spillover into their asset management subsidiaries, which may be experiencing relatively better performance. This could provide hiring opportunities to the pure-play asset managers during Q1/Q2 2023.
