Star fund manager culture is dying out and asset manager pay will not keep pace with business growth over the next four years, a new report by PwC finds.
Compensation for asset managers as a percentage of revenues will fall to 35 per cent by 2020, from a high of 45 per cent. At the same time investible assets will increase from $64tn today to an estimated $102tn in 2020.
The culture of star managers is also declining, according to the report, entitled Rethinking reward as asset management moves centre stage. Instead compensation structures will reward team decisions and outcomes.
“We expect a move away from the star manager culture and towards team-based incentives which in turn should have a positive impact on the reputation of the industry and mitigate risks of high-profile departures for individual firms,” says Tim Wright, partner in PwC’s reward team.
“Rather than firms selling individuals and individuals’ track records, it’s going to be much more around investment process and how sustainable the business is, how it can deal with people coming and going.”
The report stated that both senior executives and clients understand the material risk in promoting individuals instead of a team. Firms will also increasingly focus on succession planning to mitigate the impact of top performing individuals leaving.
One high-profile example is Invesco Perpetual, which saw £5bn in outflows in the year following star manager Neil Woodford’s departure in 2014.
Elsewhere, the report pointed out that Aifmd, Ucits V and CRD IV require prescriptive pay structures for some employees, changing the structure of pay. However, Wright says a more indirect impact from this is the increased transparency and disclosure that such regulation brings.
“Asset managers need to explain more about their pay practices to people, and I think through doing so that will make organisations think about how their remuneration practices look to the outside world, because they’re going to need to be able to explain and justify them in the future.”
Fees will come under increasing scrutiny due to the rise of passive funds, and management fees will dominate as performance fees become scarcer, the report predicts. Investors will want firms to demonstrate the alpha they produce and how staff are compensated for that.
The report says while some firms will disclose the bare minimum about remuneration required by legislation, others will pride themselves on their transparency.
Since 2012, SCM Private co-founder Gina Miller has been campaigning to increase transparency about fees through the True and Fair Campaign. Just today, Woodford Capital announced it was launching a new initiative to increase transparency around active management costs.
By 2020, PwC anticipates equity-based, long-term incentives will be concentrated among senior management. At the same time, a head of risk or compliance sharing in the bonus pool will be seen as a conflict of interest.