Asset managers (AMs) are seeing their revenues tighten due to competition, market volatility, regulation and client demands — all of which erode margins.
To grow and achieve scale, many now focus on maximising their unique selling point and leveraging the value it brings to clients. Cost is often a secondary consideration outside of finance departments, although this is likely to change as the market is currently in flux.
Firms that are successful in managing costs focus less on immediate ‘cost out’ and more on reducing the marginal cost of growth. With this as a priority, these firms can grasp their current cost hotspots: what drives cost, what is scalable and what is not. They link this to their forecasts and growth strategy to understand where they need to invest, ensuring their transformation departments deliver the underlying platform that scales with the business strategy.
Factors affecting enterprise cost maturity
The relative maturity of cost management differs across firms. Whilst there is an appetite to control costs, businesses often focus too centrally on managing current costs tightly rather than transforming to manage cost increases. Firms are less able to gain a broader perspective if they do not know what drives cost growth or do not understand where cost is within their business.
The cause of these mistakes often comes down to businesses not fully understanding or articulating their strategy and vision across the company. Or perhaps it is caused by a lack of discipline on delivering to tight business priorities or due to years of under-investment.
As such, AMs should critically assess their business against eight key vectors, as illustrated below.
|Why These Vectors Are Key||Market Leading Maturity|
|Scalability||Without a scalable business model, AMs will never benefit from growth and will likely see margins erode as they enter new asset classes or business lines.||There is a limited increase in cost for existing mutual business lines or asset classes as they grow. New business lines have a higher income-cost ratio but reduce quickly in line with the asset growth to standard market level.|
|Headcount Control||FTE costs typically form 50–70% of an AM’s cost base, so clear evidence of planning is needed as the business scales in either direction.||FTE remains in line with what is budgeted annually, and there is a full understanding of what drives the effort at an activity level. There is an ability to systematically predict effort changes based on the business plan and forward plan (multi-year) investment to minimise the impact on areas of high sensitivity and growth. Departments have the right resource profile to be flexible to support strategic initiatives (nimbleness) and under downside stress scenarios.|
|Cost Visibility||Poorly allocated indirect costs often indicate efficiency opportunities.||Allocations are made on a true usage basis and illustrate future costs, giving business lines full visibility.|
|External Costs||External costs can account for a sizeable proportion of overall costs and often grow with an AUM. A link to strategy is needed to manage these effectively.||Relationships are actively managed, with priorities for future development clearly articulated and prioritised to the vendor. Cost is tightly controlled, but the relationship functions as a partnership and is regularly benchmarked.|
|BAU Technology||At a minimum, technology should help support process improvement and then automate. Technology helps redesign entire functions and changes what you do, not just how you do it. However, despite the promise, many still find it holds them back and adds cost to processes.||Technology supports today’s business adequately and assists in changing and rethinking the processes altogether, rather than just evolving or automating. The risk associated with the process is low, controlled and constantly decreasing.|
|Growth & Nimbleness||Operating models that cannot adapt across the value chain invariably prevent AMs from winning new business or create manual inefficiencies that, once established, are not easily worked out of the process.||Technology works with the business and helps it grow by offering solutions when the firm is ready. It is rarely an impediment to providing new services.|
|Change Efficiency||If the proportion of change spend focused on non-discretionary items (such as maintenance, fixes or regulatory) is too high, there is either not enough spend on technology or the overall architecture is creaking and needs a more transformational view to resolve.||Less than 30% of change spend is focused on maintenance and non-discretionary.|
|Strategic Direction||If an AM cannot clearly communicate the strategy/vision that permeates the business, people’s actions and activities will not underpin it. Finite change spend is misdirected, and the opportunity to drive the AM’s strategy is last.||Strategic direction is clear and understood by all, and all colleagues know how they contribute. All business decisions are made based on the strategy, controlled through the appropriate governance. Core deviations from the strategy are conscious and decided by executive committees, and the strategy is revised based on them.
These decisions permeate across the organisation, and adjustments are made based on them, e.g. redirection of change spend.
Start small, think big
Understanding where you are today and how you compare to the wider market is often the best way to align your firm around an agreed starting position as a basis for improvement.
Within the industry, businesses typically occupy one of three positions.
These firms have no immediate issues with their current cost base and have confidence they can scale and maintain, ensuring controls and planning cycles keep the operating platform scalable.
- In the pack
Businesses in this segment also have no immediate issues with their current cost base but recognise that they cannot scale easily. They need to understand what drives costs to align transformation efforts with their strategy effectively.
Any firms in this position have immediate issues with their current cost base and recognise that they are unable to scale. They need to understand their drivers of cost and align their strategy, combined with a realignment of their current cost base.
At AIVIQ, we are specialists in helping clients understand their current position. We provide asset management-specific recommendations that support transformations to save and scale rather than issuing a simplistic cost-cutting list.
If you are an asset manager interested in discussing how Aiviq can help you scale strategically, contact us today.