Paychecks have grown fatter in the asset management space, but challenges to compensation models remain.
Among firms that saw a rise in 2017 compensation was BlackRock, the world's largest asset manager. BlackRock's 2017 bonus pool increased by approximately 9%, as the firm's assets topped $6 trillion —a 22% rise from the year before — amid record net inflows of $367 billion, Bloomberg reported in January.
This followed a 2% to 4% bonus reduction in 2016, when BlackRock recorded its first revenue decline since 2009.
Average compensation levels for asset management professionals overall in 2017 rose approximately 7% year over year, according to a report from market research firm Greenwich Associates and consultancy Johnson Associates.
The solid stock market rally meant equity managers were favored over those in fixed-income funds. In fact, fixed-income portfolio managers saw an overall 14% decrease in compensation last year, according to the study.
There was, however, a huge disparity between average compensation for hedge fund fixed-income managers and those at traditional asset management firms: $940,000 vs. $490,000.
Hedge fund compensation overall rose approximately 5% from 2016, even as several firms underperformed.
In its 2018 outlook, Johnson Associates said it expects overall compensation in the financial sector to increase again. However, said Managing Director Alan Johnson in a report, "the momentum from 2017 may be difficult to replicate in 2018, especially within select sectors like asset management, where fee and product pressures remain."
Asset managers have been cutting costs by eliminating jobs and investing heavily in technology solutions, a Bloomberg report noted. In March of last year, BlackRock cut dozens of jobs across their active-equity group, replacing them with automated solutions. The firm also moved more assets into passive products and cut fees on some of its newer Advantage funds by around half.
In January, BlackRock CEO Larry Fink told The New York Times that "we have been very aggressive with fee cuts, yet our margins continue to expand."
THE PASSIVE CHALLENGE
Still, the continued ascendancy of low-cost passive funds continues to put pressure on compensation overall, particularly in the active management space.
Boosts in AUM for active managers over the past year have largely been the result of asset appreciation — not growth in new assets, which are flowing mostly to low-cost index products, the Greenwich report said.
Passive growth in the institutional space was especially strong in 2017: "In the face of this massive migration, active managers have started negotiating and cutting deals on fees to retain assets and clients."
As firms face these fee pressures along with the need for costly technology investments, employees will experience compensation challenges in numerous ways, "including reductions in incentives and the 'juniorization' of jobs that depress salaries and overall compensation for internal roles," the report said.
At the same time, employees will need to do more to compensate for staffing decreases, including managing more clients and covering additional market sectors.
Considering these increased demands, asset managers are crafting compensation plans that tie incentives more directly to specific dollar targets and other goals, per the report. The ongoing shift to passive is also forcing some firms and active managers to differentiate themselves through innovative products and strategies to prove their worth.
"You find a need, you fill the need, you get paid. If you aren't finding a need, your fees have to come down," Christopher Zook, chairman and founder of CAZ Investments, told Money Management Executive. "As an industry, we have to learn each year how to add more value, so that people don't ask at an investment meeting if we were worth the money."
The passive movement has been a boon to ETFs, which saw inflows of approximately $476 billion in 2017, according to ETF.com. Passive ETF products saw the largest inflows.
Kevin Quigg, chief strategist at Exponential ETFs, explains that compensation structure in ETFs comes with its own challenges.
"Unlike mutual funds and separate accounts, whose sales go directly through the asset manager, ETFs are bought and sold on the exchange," he says. "Tracking any individual sale is akin to tracking down who bought shares of Microsoft on any given day."
He continues, "The key to successful ETF compensation plans is developing a framework that replaces rewarding individual achievement with broader firm and product success by expanding the number of distribution roles with skin in the game."
As a result, he explains, all contributors to the sales cycle will have an incentive to see fund and firm growth.
REWARDING TECH EXPERTISE
Financial firm employees with tech expertise, particularly in data and analytics, may find themselves in a favorable compensation position, the Greenwich study noted, as their talents are increasingly coveted.
Firms are demonstrating willingness to give hefty pay boosts to particularly talented young tech experts. However, "these big jumps are still cheap relative to the much bigger compensation packages required to retain more-senior employees," said Johnson Associates managing director Francine McKenzie in the report.
LOCATION, LOCATION, LOCATION
A shift may be afoot in cost-of-living pay structures, the study found.
While asset management firms have generally maintained a more across-the-board pay structure, the research showed that, over the past year, firms are increasingly considering location when it comes to constructing compensation plans.
This means higher base salaries may be the norm in more-costly areas, such as New York and San Francisco, than they are in, say, Kansas City, Missouri.
This trend applies not only to investment managers but to client services and technology employees.
Strong investment results may not always be enough to boost managers' compensation, noted the study.
The cost-cutting trend among asset management firms may lead to "tough compensation discussions" however strong overall investment performance may be.
On average, organization and department performance were perceived as the largest drivers of incentive compensation, at around 55% to 75% of individual incentives in 2016.
Individual investment performance dictated at least 25% of incentive awards.
However, given the industry's increasing push into expensive tech and expansion into new products and distribution channels, "the resulting margin pressure is forcing asset managers to manage costs aggressively throughout their firms. And for most firms, one of the primary costs is compensation," said Greenwich Associate Director William Llamas in the report.
"What we are experiencing - and what many more professionals will experience [in 2018] — is the delinking of investment results and compensation," he added.
THE RETURN OF VOLATILITY
Volatility returned to the financial markets in the first quarter of 2018. U.S. stock funds overall experienced outflows of over $63 billion, according to data cited from Trim Tabs, and the S&P 500, Dow and Nasdaq started the second quarter in correction territory.
When asked by Money Management Executive about the effect of renewed volatility on compensation, Llamas referenced the industry advantage such activity can have, particularly with those in the active management space. "Market volatility and performance will continue to have a positive effect and be the biggest driver of asset management compensation moving forward," he said.
"However," he added, "increasing pressure from fee reductions and continuous investment in technology may compress compensation, regardless of market activity."
Speaking on the ETF market, Quigg notes that volatility and market corrections have both a macro and micro effect on compensation.
"From a macro level, volatility — and particularly market downturns — adversely affect fund asset levels upon which revenue, and ultimately incentive compensation, are based," he says. "We have seen hints of this already with ETFs experiencing flow challenges for the first time in quite a while."
The past two months saw the first consecutive ETF outflow activity since 2008, with $4.4 billion in February and $2.7 billion in March, according to data from ETF.com.
From a micro level, Quigg says, "volatility and downturns weather-proof a compensation plan in that plans designed to promote positive behavior, including the retention of assets, will align firm and salesperson behavior. Plans that are overly reliant upon new asset growth will be challenged."
Johnson's McKenzie, while noting firms' continued fee and product pressures, is generally optimistic about the immediate compensation outlook.
"Even with the recent market volatility, we continue to forecast a positive outlook for 2018 asset management compensation, which would build on the significant pay levels delivered in 2017," she told Money Management Executive, while noting the trajectory could change if there is a sustained and deep downturn.
"With increased market and sector volatility, we are likely to see more outliers, depending on strategy and focus, than we did in 2017, where many boats rose in tandem with the market," she says. "Those in the industry that would especially benefit from volatility would be the large brokers whose advice and guidance during turbulence is often sought."
Overall, she adds, despite the challenges, "large asset management firms are well- managed, positioned and structured, and will continue to offer real career and compensation opportunities."