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Special report: Outlook 2019

Reduction in revenue puts retention of talent at risk

Amanda Walters said compensation will have to be reduced if fees drop dramatically.

Tighter margins forecast for institutional money management firms in 2019 also could make it more difficult for managers to keep their portfolio management talent, sources said, as reduced revenue could lead to less money for compensation.

"Key assets leave every day, and those are the people," said Jason Schwarz, president, Wilshire Funds Management and Wilshire Analytics, Santa Monica, Calif. "It's always the case that retaining key investment talent weighs heavily on a company's performance. In a world where fees are shrinking, managers need to keep their portfolio managers compensated, which means they might have to cut margins further to do that."

Michael Falk, partner at Long Grove, Ill.-based money manager consultant Focus Consulting Group Inc., agreed. "The biggest hurdle for fulcrum fees are the compensation packages for money management employees," Mr. Falk said. "When you go to fulcrum fees, all of a sudden those professionals not performing well will get their compensation aligned more with beta fees than alpha fees. So volatility of their compensation will be exacerbated by fulcrum fees. Managers converting to those (performance-based) fees will require them to get their talent on board. That won't be easy."

Will that lead to more potential for investment team moves between managers as they look for better compensation? "Absolutely, if the industry move to fulcrum fees is gradual among all managers," said Mr. Falk. "Then teams could find some firms that will still pay higher compensation. But if the industry converts quickly, there'll be few places to move. The question will be how much longer the grass will be greener on the other side."

But compensation changes that could happen in 2019 will depend on which manager takes the first leap, said Amanda Walters, New York-based senior manager at Casey Quirk,a practice of Deloitte Consulting LLP.

"We're starting to see managers saying that pay has to come down — not so much at big firms but at middle-of-the-road firms," Ms. Walters said. "But no one wants to be the first mover. However, once that happens, there will be fewer places investment professionals can go since few of them get best-in-class results. I don't know when we're going to get there. My guess is that fees will probably be sorted out before compensation. Pay is now based on performance, so the challenge is, if fees drop dramatically, compensation will have to be dropped."