First, let’s acknowledge that the asset management business is one of the most lucrative businesses in the world. A recent Casey Quirk study highlighted that the largest asset managers in the US generated an operating margin of 29% in 2018. To put this into perspective there was only one other sector in 2018 that came close to being this profitable (Information Technology) and most sectors generated margins less than half of the asset management business.
Now the bad news: Post financial crisis, the operating margins in the asset management business peaked in 2014 at 34% (now 29%) and it is most likely this downward trend will continue due to two headwinds: the increased pressure to lower fees AND the rising cost of doing business. (Some anecdotal evidence of fee compression: according to Morningstar, 44% of share classes reduced their fees in 2018.)
So, what does this mean for sales folks?
Accounting 101 teaches us the difference between fixed costs and variable costs. Fixed costs tend to remain constant while variable costs can easily change as companies are forced to dial-up or dial-down their expenses. Most asset managers tend to put their employees into these two different buckets:
Fixed Costs– Operations, Finance, Compliance, etc. These are employees that are NEEDED to run the business regardless of economic conditions. Sure, you can tweak it on the parameters, but it tends to stay consistent year-in and year-out.
Variable costs– Sales, National Accounts & Marketing. Headcount and compensation can easily be dialed-up or dialed-down based on the “health” and forward prognosis of the business. Unfortunately, when margin compression exists it is these folks that face the brunt of the pain.
So decreased margins tend to force asset managers to look for ways to decrease expenses. Two trends we are currently seeing:
1. Reduced wholesaler headcount – The implications are that you can keep individual compensation at a somewhat steady level but the overall expense “pool” goes down seeing as you are paying less people. Given the steady wave of unemployed wholesalers, it is obvious this is not a short-term trend. We are entering a “survival of the fittest” mentality.
2. Pay wholesalers less – Based on multiple conversations, my observation is that the overall compensation for top tier wholesalers is, somewhat, declining but still averages above $400k/year. This will get dialed-down in the upcoming years.
Currently, you are seeing a combination of these two trends. Many firms have scaled back their sales force while minimizing the pain of dramatically lowering the compensation. Personally, I think we are in a cycle that will continue for the next few years: lower headcount, lower comp, lower headcount, lower comp. It’s inevitable given the declining margin backdrop and I can only imagine how accelerated this will become when we hit a bear market.
So, firms have to think about how they can raise and retain assets in the most efficient manner possible. The only thing on their minds is how to increase margins (or keep them steady). Remember, they don’t have a lot of “dials” at their disposal to manage this initiative and it is a lot easier to manage expenses than predict revenue. So how do sales folks survive? You prove yourself indispensable to the firm. You make sure that you stand out against your peers based on the metrics that gauge your success. The ultimate goal is to make sure they view you as a fixed cost not a variable cost. That you are NEEDED to run the business.