Even as equity values continue to fall and economic woes mount, certain financial services firms will emerge as leaders, and the ones that do will be those that focus on long-term success, according to a report released Monday by management consulting firm Casey, Quirk & Associates and asset management compensation consulting firm McLagan, titled “Crisis in Asset Management: Industry Profitability Under Siege.”

Based upon interviews with executives at 50 firms, the two consultancies estimate that asset management firms’ operating profits could fall 35% from 2007 levels by the end of this year. And those profits could fall another 35% in 2009, without significant reductions in headcount, incentive compensation, or both.

“The fourth quarter is only a warm-up for an extremely challenging 2009,” said Jeb B. Doggett, a partner with Casey Quirk. “Deep cost-cutting will be unavoidable for most firms, and some may have to exit whole business lines in order to defend their core competitive advantages. The difficult environment will test all firms.”

Firms with strong capital and that offer a diversified asset mix will fare the best and be in the best position to take advantage of growth opportunities that will inevitably emerge once the financial crisis subsides. Smaller firms, equity-focused fund managers, and multi-capability operations without strong competitive differentiators will struggle the most, according to the report.

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