Investment managers who want to maintain and increase their firms' profitability should concentrate on attracting and retaining customers, according to a new study.
The study, released March 6 by Investment Counseling of Mill Valley, Calif. stressed that investment management firms can no longer rely, as they have in the last several years, on strong financial markets as a primary means of increasing profitability.
In addition to having to contend with the market slowdown, money managers must contend with increased competition for consumer assets, not only from direct competitors, but also from online financial portals, insurance agents, and fund supermarkets. The development of companies commonly selling competitors' products, or open architecture, has transformed the industry from one that is supply-driven to one that is demand-driven, the study said.
Due to the changes in the marketplace, operating expenses are growing faster than revenues. In 1999, the last year for which Investing Counseling had figures and arguably the last year of the bull market, operating expenses increased an average of 22.9 percent over the previous year while revenue increased an average of 21.1 percent. In the two previous years, revenue growth outpaced operating expenses between five and six percent.
As a result, investment management firms must focus on the ideal mix of marketing, distribution, and client services that will keep customers from defecting to other means of investing. Firms must also figure out a way to balance their spending on developing and promoting their offerings and on compensating their key talent while increasing their profit margins. Salaries, bonuses, and perquisites make up 64 percent of all operating costs, the study found. Firms need to find ways to hold onto their key managers since they can be crucial in developing consumer-focused strategies that are key to surviving in the changing financial marketplace. Despite the growing competition, the potential for growth is enormous. In 1999, only 47.4 percent of all U.S. households owned a mutual fund, up from 5.7 percent in 1980, but there is still a large untapped market.