Russell Reynolds Associates: Rebound in Optimism Outpaces Bottom Line Reality at Asset and Wealth Management Firms

--Russell Reynolds Associates' Annual Report Helps Define the New Reality

The recent rebound in global financial markets has infused the asset and wealth management industry with a new sense of optimism, however, recent earnings will not be sufficient to offset the damage sustained during the first part of the year. As a result, the industry is in for some challenging conversations regarding year-end bonuses, given that forward-looking expectations are outpacing the current reality of the bottom line. For CEOs and boards at these firms, communicating the right performance and reward message will be tougher than ever before, according to a new report by global executive search and assessment firm Russell Reynolds Associates.

"Profitability--and thus bonus levels--will be driven by three factors: the rebound in investment performance, the retention of assets under management, and how quickly and deeply firms trimmed costs when the downturn hit," notes Cornelia L. Kiley, a managing director in Russell Reynolds Associates' Asset and Wealth Management Practice. "Even though accruals are now moving in the right direction, unless firms were able to align all three factors, bonus pools are likely down 20 to 35 percent from last year."

The thirteenth annual report, Defining the New Reality for the Asset and Wealth Management Industry -- 2009 Recruiting and Compensation Trends, released today, is a qualitative review of talent and compensation trends within both traditional asset and wealth management firms and those focusing on alternative investments, including hedge funds, real estate, and private equity, in the Americas, Europe and Asia/Pacific.

Key findings from the report include:

A Major Restructuring of Compensation on the Horizon

-- CEOs may use the upheaval of the last year as an opportunity to fundamentally reexamine the compensation structure for their leadership teams and senior investment professionals. "In many ways, the events of 2009 have shown that the traditional compensation model is unsustainable," said Deb Brown, a managing director in the firm's Asset and Wealth Management practice. "A greater percentage of compensation will be deferred, the duration extended, and there will be a greater alignment of incentives with long-term profitability, rather than with short-term performance. Clawback and holdback provisions will also become more common."

-- Retention is a critical issue as management teams struggle to stretch limited bonus pools. For most firms, there will be broad differentiation across performance bands. Not wanting to disappoint top performers for a second year in a row, many firms will skew bonus payments to retain "keepers"--but the deep personnel cuts of 2009 means that there are fewer employees to "fund" those top performers.

-- There is a sharp dichotomy in compensation expectations between buy-side and sell-side firms. While several of the large banks and securities firms are now enjoying a massive improvement in earnings, many asset managers still struggle and are expecting another down year. This split in fortunes will affect talent flows and puts buy-side firms at a near-term relative disadvantage when competing for talent in areas such as finance, technology and operations.

-- As the industry enters a period of potentially slower growth and lower profitability, forward-thinking firms will begin to tackle the cultural shift necessary to augment a purely money-driven culture with one that incorporates more sophisticated, intangible motivations and rewards.

Several Bright Spots in an Otherwise Lackluster Recruiting Environment

-- "CIO hires continue to be brisk," reports Brown, as endowment and foundation trustees and plan sponsors seek to manage the challenges of the current market as well as reinvent the investment model. At endowments in particular, CIO compensation has become a political lightning rod, making it more attractive for some to outsource and pay fees to a third party than pay internal investment teams the salaries needed to retain them.

-- High-yield, investment grade and distressed debt backgrounds were in demand as credit spreads widened and firms took advantage of investment opportunities.

-- Active equity recruiting was very slow; what hiring there was centered on international equity and quant talent. At some shops, equity mutual fund outflows to bond funds, exchange-traded funds, and inflation hedges resulted in some teams and product offerings being eliminated entirely, resulting in layoffs or migration to the institutional business.

-- Alternatives firms are now focused on repairing relationships between the General Partner and Limited Partners. Investors are expecting managers to better align performance with strategy, better manage liquidity and risk, derive proper valuation of securities, develop new fee structures, and openly communicate to all clients with a greater level of transparency. In private equity, this is placing a premium on executives with operational expertise who can meet investor expectations for portfolio company performance. In the hedge fund arena, several large firms are expanding their capabilities, hiring aggressively and are beginning to resemble full-service capital markets platforms.

-- "Pure-play, stand-alone money management organizations continue to be the most attractive platforms for investment talent," said Brown. "Having said that, insurance companies were active recruiters this year, seizing the opportunity to upgrade talent by installing new CEOs for investment subsidiaries, bringing in new CIOs, Heads of Alternatives, and other key roles."

Retail vs. Institutional Distribution Professionals

-- The crippling cost of retail distribution is prompting firms to develop new models whereby economies of scale can be achieved. Having cut wholesaling staffs by 25 to 50 percent, organizations are now considering alternatives such as national account relations efforts supported by web and teleservice capabilities, internal sales desks with minimal field staff, and third-party outsourcing.

-- Institutional distribution on the other hand, continues to be strong, with ongoing hiring by traditional and alternatives players. Capital raisers with proven track records of raising assets and improving client penetration --particularly with public pension plans, sovereigns and corporates--continue to be sought after. Because there has been relatively little headcount reduction within institutional distribution, top talent cannot easily be acquired.

Infrastructure Functions Are Revisited and Recast

-- Risk management has become an enterprise-wide focus, with a "do-it-yourself" mentality, thereby reducing reliance on regulators and rating agencies who got it wrong. In the wake of the Lehman Brothers collapse and the Madoff scandal, demand for executives with experience assessing counterparty and operational risk far outstrips supply.

-- Technology and operations was hit early and deep, sustaining cuts four to five times greater than firm-wide levels. IT outsourcing firms experienced robust demand for services as financial firms reconsidered the capital costs and complexities of managing technology and operations infrastructure internally.

"We look to 2010 with guarded optimism," said Kiley. "New recruiting mandates are beginning to materialize as firms prepare for modest additions to headcount. Backburnered initiatives that can bolster top-line growth are becoming priorities."

About Russell Reynolds Associates

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In today's global business environment, success is driven by the talent, vision and leadership capabilities of senior executives.

Russell Reynolds Associates is a leading global executive search and assessment firm with more than 300 consultants based in 39 offices worldwide. Our consultants work closely with public and private organizations to identify, assess and recruit senior executives and board members to drive long-term growth and success. We value teamwork, serving our clients with a collaborative approach that spans our international network of sector and functional experts.

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SOURCE: Russell Reynolds Associates