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Money Management

Casey Quirk: Operating margins eroding for publicly traded money managers

Operating margins for publicly traded, diversified money managers fell to a median 29% in the year ended Dec. 31, a level not seen since 2011 in the aftermath of the financial crisis, estimated Casey Quirk, a business of Deloitte Consulting.

The median peak operating margin in the previous 10 years was 34% in both 2014 and 2015 for the firm's universe of publicly traded global money managers.

Casey Quirk's analysis estimated that even as total assets under management by publicly traded investment firms rose an annualized average 6.9% over the three years ended Dec. 31, operating margins fell by an annualized median of 5.2% over the same period.

AUM totaled an estimated $12.7 trillion as of Dec. 31, down 7.3% from the prior year but up 12.4% from year-end 2016.

"Our research showed an interesting decoupling of growth in assets under management and operating margins. Previously, when AUM rose, so did margins," said Amanda Walters, a senior manager who is based in the firm's New York office, in an interview.

Ms. Walters attributed the declining profitability of publicly traded money managers to fee pressure and compression, and rising costs of doing business.

For example, investment management fees charged by publicly traded managers across all strategies were down an annualized average of 4.5% in the three years ended Dec. 31, with an average annualized decline of 5% for both active and passive strategies, according to Casey Quirk's estimates.

The firm's research found that investment management fee compression is affecting all strategies, including active and passive strategies, as well as alternatives, Ms. Walters said.

"There are pockets of really high-performing traditional managers or firms with unique strategies (that) are not experiencing fee compression, but otherwise, fee pressure is affecting all strategies," she said.

Ms. Walters said the cost of technology upgrades, compliance and employees are rising for publicly traded money managers as they seek to increase profitability and efficiency.

"I see the reaction in the market as managers cut costs in some areas that aren't accretive to the business or to reduce redundancy and reallocate capital elsewhere," she added.