Research finds that industry consolidation has led to additional costs as firms fail to make the right choices
The financial-services industry has had its fair share of mergers and acquisitions in recent years as cutthroat competition forces widespread consolidation. But if asset managers in Canada fall mirror a global industry trend, they’re making plenty of costly missteps.
A newly released report by Casey Quirk revealed that despite the record-setting pace of mergers and acquisitions, the asset-management industry has been saddled with 5% to 8% of legacy duplicate costs, or US$6 billion to US$8 billion annually. The problem, the new report asserts, stems primarily from poor post-merger integration planning and execution.
“Asset management executives, reluctant to disrupt talent and hamstrung by the costs of legacy businesses, struggled to make the hard decisions necessary to realize the value of the combined organization,” Casey Quirk said.
While transactions between asset managers reached an apparent high in 2018, the wave of consolidation has failed to prevail against headwinds such as shrinking organic growth, unrelenting fee pressure, and rising fixed costs spurred by tech-driven competitive advantages such as data, digital delivery, and operating process improvement.
“Gaining more assets under management, an increasingly outmoded metric, does not make a firm more competitive,” the report underscored. Industry transactions have largely prioritized size over focus or leverage, with many asset managers avoiding functional integration. The reasons for this include the desire to preserve the appeal of distinctly branded, autonomous boutiques, protect distribution relationship continuity and niche product expertise, and steer clear of execution risks that come with migrating or connecting technology platforms.
“The benefits of such well-intentioned arguments have proved difficult to quantify … The costs of such logic, however, are more visible,” the report said. Relative to their counterparts, asset management firms that embraced integration following mergers had general ledgers with positive organic growth rates based on net new flows, 20% more profits provided to shareholders, more spending on investment talent, and 8.5% less in operational costs.
To unlock significant value, the report suggested that integration efforts be focused on four core functions. In terms of organizational leadership, firms must resist the temptation to maintain all key leadership following acquisitions or set up co-leadership structures; such unwieldy arrangements could create overly complex governance systems, entrenched and territorial legacy cultures, excessive talent costs, and other weaknesses.
Distribution functions can also benefit from integration. In particular, firms can reap advantages from diagnosing and eliminating overlap between segment-level functions, creating transition plans in at-risk client accounts, and realigning resources from segments with low growth prospects to ones that will realize more demand for the firm’s products and services.
In terms of their enterprise and investment operations, well-integrated asset management firms also enjoy greater efficiency as they decrease their outsourcing costs and leverage enterprise shared services.
And while firmwide systems integration or joint outsourcing efforts can be complicated and perilous, successful efforts can result in technological upsides in terms of market data, hardware infrastructure, client relationship management tools, cyber and disaster recovery programs, HR and finance enterprise systems, and investment systems including order management and trade processing.
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