GLOBAL INVESTMENT MANAGEMENT COST SURVEY 2009

Transcription

1 Report on GLOBAL INVESTMENT MANAGEMENT COST SURVEY 2009 DATE OF PUBLICATION: 8 SEPTEMBER 2009 RESEARCH BY: SIMCORP STRATEGYLAB AND THE NIELSEN COMPANY SUMMARY: THIS REPORT OFFERS DETAILED INSIGHTS INTO THE WAY MANAGEMENT REPRESENTATIVES FROM MARKET-LEADING GLOBAL FINANCIAL INSTITUTIONS VIEW AND APPROACH COST MANAGEMENT AS A MANAGEMENT DISCIPLINE IN A 360-DEGREE PERSPECTIVE.

2 SimCorp StrategyLab thought leadership in applied IT and investment management SimCorp StrategyLab is an independent research institution founded and sponsored by SimCorp. SimCorp StrategyLab conducts research, publishing and seminar activities in the investment management sector within the fields of finance and information technology. It is the purpose of SimCorp StrategyLab to build bridges between research and practice and to provide for an improved stategic decision making. Specifically, its work aims at suggesting: ways to mitigate risk ways to reduce cost ways to enable growth. Quite a significant part of the research is conducted in close partnerships with renowned academic institutions, individual academic researchers and other expert partners. The scope of SimCorp StrategyLab s research is centred around identifying, understanding and suggesting solutions to issues pertaining to mitigating risk, reducing cost and enabling growth. This research is relevant to the highest strategic levels of institutions in the investment management industry. In addition, the research aims to consider the suggested solutions from an IT perspective. 2

3 Preface Cost levels and structures of asset management businesses have taken center-stage in the highly stressed financial markets of recent years, with clients far more sensitive than usual to portfolio efficiency and performance. Cost ratios have become fundamental to distinguishing winners from losers across the full range of asset managers, driving the size of assets under management as well as the profitability of the businesses that manage them. This trend is likely to continue well into the future few statistical findings in modern finance are as persistent and robust as the impact of expenses on for instance total fund performance through a variety of financial market cycles. As a key determinant of asset management charges to clients, product and process costs have therefore taken on ever-growing importance. SimCorp Strategy- Lab is pleased to release this detailed cost survey of major asset managers which reinforces these observations. The survey will be followed by an anthology comprising the best current thinking on cost issues related to asset management. It is the second in a series of issue-specific projects complementing a comparable survey and an anthology on risk matters released in August 2009 designed to address key concerns confronting asset managers going forward. Professor Ingo Walter Director of SimCorp StrategyLab 3

4 Contents Methodology 5 Summary of findings 6 Investment management businesses in the red: structured cost management approach seems to separate winners from losers 8 Survey findings 11 Investment style 11 Cost structure review frequency 11 Reduction methodology 11 Cost management 12 Outsourced areas 12 Cost-cutting projects over the past two years 12 Cost-cutting projects in the next six month 13 Cost drivers 13 Savings Past 13 Expected Savings Future 14 Savings degree 14 Cost-cutting initiatives duration 14 Degree of cost-cutting initiatives 15 Barriers in cost optimisation 15 Cost management strategies 15 Aspects of cost management 16 Cost management 16 Cost structure trends 16 Reasons for losses 16 Extent of financial losses 17 Cost measured 17 Frequent and systematic monitoring 17 Losses absorbed on clients behalf 17 Most used cost metric indicator 18 Benchmark cost metrics 18 Investment style crossed with cost percentage 18 Cost structure review frequency crossed with cost percentage 19 Cost management methodologies crossed with cost percentage 19 4

5 Methodology This survey is based on 100 CATI interviews with respondents from around the world. Sample, regions Europe; 50% The specific interview distribution is 50 from Europe, 25 from United States and 25 from the Asia-Pacific region. US; APAC; Respondents were selected based on industry directories. Only one contact person per company was interviewed. The questionnaire was created by SimCorp and was examined by The Nielsen Company prior to field work. The SimCorp StrategyLab was not revealed as the client behind the study unless prompted by the respondent. All respondent answers are anonymous unless the respondents specifically agreed to have their answers reviewed. Sample, positions of respondents Sample, sub-sector Fund management company (only); 3 Manager(In general) Risk Manager CFO(Chief Financial Officer) COO(Chief Operating Officer) Head of Department Portfolio manager Investment manager Director Vice President Operation Manager Managing Director CEO(Chief Executive Officer) CIO(Chief Information Officer) President Account Manager Asset Manager Assistant Manager Cash manager General Manager Deputy manager Senior Manager Excecutives Other Prefer not to disclose 4% 1% Third Party administration company (only); 4% Fund of Fund Managers; 0% 1 Fund distribution company (only); Private Pension Fund; Public Pension Fund; Insurance company; Mutual fund company; Hedge fund; 1% Other; 1 Asset manager; 1 Sample, number of employees Investment Management Banks IT solutions firm 1% Technology 1% Brokers 1% Healthcare Insurance 1% Oil & gas Non Profitable Organization 1% Other 1% 100 to less than 1000; 2 B Less than 100; 24% 1000 to less than 10000; 21% Sample, assets under management Does not wish to disclose; More than 10000; 1 5 Billion to less than 10 Billion; 10 Billion to less than 50 Billion; 2 50 Billion to less than 100 Billion; More than 100 Billion Less than 5 Billion; 1 Does not wish to disclose; 34% 5

6 Summary of findings 50% of the respondents use direct distribution channels, while 2 use indirect distribution channels and 2 work with another type of distribution channel. Most (3) of companies interviewed have operations in one country, 2 in two to three locations, in four to six locations and 2 in seven or more locations. Many of the respondents manage investments on behalf of multiple types of clients, the most common being institutions (5) and high net worth individuals (4). Most companies interviewed use a mix of investment styles (3) followed by active equity only (). Once a year is the most common frequency of reviewing the company s cost structure (41%), with 2 doing it more frequently than every six months and 4% never reviewing it. 7 of companies interviewed do not use any cost reduction methodology, despite 7 answering that given the current market environment cost management has increased somewhat or significantly in importance. The majority of respondents don t know if any of their front, middle or back office processes are being outsourced. Of those that do know, 2 reply that the back office is or is being considered outsourced. 1 say front office and 1 middle office. There is an almost even split between companies that have initiated cost-cutting projects over the last two years (4) and those who have not (5). Of those that have not initiated cost-cutting projects over the last two years, 8 do not expect to initiate any in the next six months. Of the companies which have initiated costcutting initiatives over the last two years, 5 of these have been targeted at the cost driver Cost of labour. Among companies which have initiated costcutting initiatives, it seems unclear to many what the realised savings were; with 4 6 replying Don t know. The same is apparently true when asked about expected future savings, with 5 64% replying Don t know. Many (3) of the interviewed professionals were not aware of how long the cost-cutting initiatives lasted. Of those that did know, most (1) said 4 6 months, with the fewest () replying months. On average, 4 have not used any consultants, such as specialised cost management consultants or accountants. Overall largest barrier in cost optimisation is Lack of transparency across the organisation. Second largest is Difficulty in measuring cost savings. Cost reduction, Increased cost efficiency and Greater process efficiency are expected to be the most important aspects in the future. 80% of interviewed respondents agree that changing the cost structure is a source of long-term competitive advantage. The top three mostly measured costs by the interviewed companies are IT cost of operation (4), Transaction cost per trade (3) and Implementation of regulatory requirements and compliance rules (2). These are also the most actively monitored on a frequent and systematic basis. 6

7 of respondents reply that their company has had to absorb losses on behalf of their clients. The three most used cost metric indicators are IT cost of operations (1), Transaction cost per trade () and Implementation of regulatory requirements and compliance rules (). The same cost metrics are also the top three used for benchmarking. 7

8 Investment management businesses in the red: structured cost management approach seems to separate winners from losers By Professor Michael Pinedo, Stern School of Business, New York University, and Assistant Director, SimCorp StrategyLab, Lars Falkenberg The investment management industry has been through some of the toughest times in its modern history. Consequently, this survey indicates that as much as 41% of the entire industry is operating with cost rates at or above 9. Only 1 of the businesses surveyed operate with cost rates less than 8. Financial top performers in the industry tend to pursue structured cost reduction methodologies such as Business Process Improvement (BPI) or Lean Six Sigma. Processes and cost efficiency are regarded as important future cost reduction targets. As a direct reflection of the pressure on profit in the industry, 7 of the businesses surveyed claim that cost management has gained increased strategic importance as a result of the current market environment, and only of those surveyed state that the strategic importance of cost management is unchanged. 4 of the investment businesses surveyed also confirm that they have had ongoing cost management projects during the past two years. To some extent, a part of these projects has been fuelled by financial losses in the industry during the past two years, and these seem to have led to enhanced focus on reviewing operational efficiencies and benchmark comparisons of cost versus peers. Despite the increased focus on cost management, it is still common practice to review cost structures only once a year, and the duration of cost cutting does not seem to be business specific. Some businesses use either a 4-6 month period or a month period. Furthermore, 7 do not follow any particular cost reduction methodology. However, when adjusting for type of investment business, this result seems to vary. While pension funds and mutual funds in particular seem to follow certain cost reduction methodologies, especially third-party administration and fund distribution companies run cost reduction projects without pursuing any specific methodology. In addition, there is generally a low awareness of both the present and expected future savings percentages. Figures in this area indicate consensus in the investment management industry. More structured approach to cost reduction projects by financial top performers In terms of profit generation ability, top performers seem to have a more structured approach to cost management. This conclusion is subject to a slight reservation due to the relatively low response rate when it comes to financial key figures 30% of businesses surveyed. Findings suggest that top financial performers with cost rates below 8 review their cost structures every six months. They use BPI or Lean Six Sigma as cost reduction methodologies, and make use of external consultants in their cost reduction projects, typically having a duration of 7-12 months. Finally, when it comes to investment strategy, the findings indicate that top performers pursue an active equity or multi-boutique investment strategy. Cost of labour the most popular cost reduction target Not surprisingly, cost of labour seems to be the most popular target for cost reduction projects 8

9 8 of respondents confirm that labour costs have been targeted, are currently being targeted or will become cost reduction targets in the future. 3 have been looking to reduce transaction life cycle cost, and they have targeted other areas such as information technology and sales and distribution costs. A closer look at these figures shows that the level of reduction tends to vary quite a lot when adjusting for type of investment business. Hedge funds/asset managers and private/public pension funds seem to be front-runners amongst businesses that have already reached a satisfactory cost level. Achieved cost reductions not sustainable Of all businesses surveyed, 5 on average have not been able to fully sustain their achieved cost reductions for more than a 12-month period. In particular, it seems to be a challenge to maintain savings derived from elimination of products and business lines (2 fully sustained), sales and distribution cost (21% fully sustained), cost of labour (50% fully sustained) and outsourcing (2 not at all sustained). Optimising cost structures in investment management firms seems to meet obstacles. When asked to rank these cost reduction barriers, 1 mention lack of cost transparency across the organisation as the overriding theme because the organisation is primarily focused on growth (.) Ranking second at is difficulty in measuring cost savings, which correlates with the low awareness as to whether the individual businesses have met their expected savings percentages. Processes and cost efficiency as future strategic targets sources of competitive advantage Over a three-year period, improving process efficiency (41%) followed by discontinuation of unprofitable funds seems to be the most important strategy across the industry in relation to cost management. By contrast, only 24% are positive towards using outsourcing as an element in the coming three-year cost management strategy. This is in line with the apparent future focus within cost management, which indicates that attention is being directed towards process and cost efficiency (4). 80% of respondents agree that changing cost structures can be a source of long-term competitive advantage. Current cost structures will come under pressure Across the surveyed investment businesses, the general perception is that they will have to review their cost structures in the future. 71% believe that increased competition will increase pressure to rethink cost structures in their organisations as well as regulatory changes (6) and pressure from shareholders and investors (61%). Cost metrics and measurement focus on IT, compliance and cost per trade In terms of measuring and monitoring of costs, three areas stand out. These are IT cost of operation, transaction cost per trade, and implementation of regulatory requirements and compliance rules. Although these areas are being measured (on average 3), active monitoring on a frequent and systematic basis is less predominant (on average ). These indications support the lack of awareness of cost reduction levels mentioned above. IT cost of operation and transaction cost per trade are also the top two areas used as cost metric indicators and benchmarked by the businesses surveyed. Investment management software not regarded as source of cost reduction In general, there seem to be challenges in the level of cost of ownership. Only 30% claim to be satisfied with the cost of ownership of their investment management software system. In addition, only 30% rate their investment management system positively as a cost reduction tool. Conclusions and additional remarks 9

10 It appears from the data that those businesses that have adopted a continuous improvement approach with respect to their costs are the top financial performers. This also applies to the best managed businesses in manufacturing (e.g. Toyota) that are aggressive users of BPI as well as Lean Six Sigma techniques; they also tend to be amongst the top financial performers in their industry segments. The fact that labour cost (headcount) is currently a very common target in cost reduction programmes can be explained as follows: firstly, headcount reduction has an immediate impact on the expenses of the business and on the bottom line. Secondly, the current crisis developed so suddenly and had such an immediate and strongly negative impact on profitability, probably even more negative than experienced in previous downturns, that, in order to counterbalance such an impact, businesses had to take very drastic measures. For many businesses, their survival was at stake. Most businesses (80%) fully realise that changing cost structures can be a source of long-term competitive advantage. A large proportion of these businesses believe that the most important strategy in relation to cost management is to focus on process efficiency. However, one needs to bear in mind that a business cost structure is strongly interconnected with various important management functions and processes that have either a medium-term or a long-term planning horizon. Some of the more important management functions with a strong impact on the cost structure are: (a) Customer Relationship Management (CRM), (b) Operational Risk Management - similar to Total Quality Management (TQM) in manufacturing, and (c) IT investments. The importance of each one of these three functions, as far as the cost structure of the firm is concerned, depends very much on the type of investment manager; whether for example it is a retail investment manager or an institutional investment manager. The difficulty in implementing cost reduction programmes is the fact that these different management processes are all very strongly interrelated. 10

11 Survey findings A mix of the above/ multi boutique Active equity only Mixed portfolios with a high degree of OTC derivatives Mixed portfolios with a high degree of alternate investment or structured products Passive fixed income only Active fixed income only Passive equity only 3 Fig 1 Investment style According to the respondents, quite a significant part of the investments consist of a mix of different investment styles. Many also describe their investment style as active equity only. Q14: Which of these best describes your investment style? Other 0% 30% 40% More frequently than every 6 months Once every six months Once a year Once every two years Once every three years Once every five years Never 1% 4% 2 24% 41% Fig 2 Cost structure review frequency Most organisations review their cost structure once a year, which is applicable for two out of five organisations. In addition, approximately one fourth of the organisations review their cost structure once every six months. Q16: How often does your organisation review its cost structure? 0% 30% 40% 50% Business Process Improvement (BPI) Total Quality Management Agile management Lean Six Sigma Other, please specify Don t use any cost reduction methodology 4% 1 7 0% 30% 40% 50% 60% 70% 80% 90% Fig 3 Reduction methodology Only one fourth follows a particular cost reduction methodology. Among these organisations, the most common used methodology is Business Process Improvement (BPI). The vast majority, three out of four organisations, don t use any cost reduction methodology. Q17: In your cost reduction, do you follow any particular cost reduction methodology, such as? 11

12 Fig 4 Cost management As a direct result of the current market environment, cost management has a somewhat increased strategic importance in most of the companies. For one out of five, cost management has the same strategic importance as always. Q18: Taken the current market environment, would you say that cost management for the company you work for has the same strategic importance as always; Don t know; somewhat increased strategic importance; 44% significantly increased strategic importance; 2 Fig 5 Outsourced areas It seems as if the back office is the area that is at most risk of being outsourced, as most respondents reply that this area is either considered for outsourcing or will be outsourced. But the majority of the respondents are unaware of which areas are at risk of being outsourced. Q19: Which of the following areas has been or are being considered for or will be outsourced by the company you work for? Outsourced Consider outsourcing Don t know % Front office Middle office Back office 0% 30% 40% 50% 60% 70% 80% 90% 7 Fig 6 Cost-cutting projects over the past two years There is an almost even split between companies that have initiated cost-cutting projects within the last two years and those that have not. Q33: Has your company initiated any cost-cutting projects over the past two years? Yes; 4 Don t know; No; 5 12

13 Yes; Don t know; 1 No; 8 (n=55) Fig 7 Cost-cutting projects in the next six month The vast majority of those who have not initiated cost-cutting projects within the last two years does neither intend to initiate cost-cutting projects within the next six months. Q34: Do you intend to do so within the next six months? Cost of labour Sales and distribution cost Transaction lifecycle costs Compliance and regulatory requirements costs Cost of risk Information technology costs Other/various cost of operation % % 2 (n=44) Fig 8 Cost drivers Among those who have initiated cost-cutting projects, the primary target has been Cost of labour, followed by Transaction lifecycle costs. Q35: Which of the following cost drivers were/are/or will be primary targets for cutting cost in the company you work for? 0% 30% 40% 50% 60% 70% 80% 90% 100% Don t know Cannot specify Will be Are Have been Cost of labour Sales and distribution cost Transaction lifecycle cost Compliance and regulatory requirements costs Cost of risk Information technology costs Other/various cost of operation Automation of processes % 4 4 Fig 9 Savings Past Among those who have initiated cost-cutting projects, it seems unclear to many what the realised savings have been, with a great share responding Don t know. Q36: What were the expected savings when it comes to? Outsourcing 50% Elimination of products and or business lines 50% 0% 30% 40% 50% 60% 70% 80% 90% 100% No cost savings 1 to 2 % 3 to 4 % 5 to 6 % 7 to 8 % 9 to 10 % 11 to 15 % Don t know (n=44) 13

14 Fig 10 Expected savings Future Also the expected future savings seem to be unclear to those who have initiated cost-cutting projects. Most respondents reply that they don t know how much they expect to save as a result of the cost-cutting projects. Q36: What were the expected future savings when it comes to? Cost of labour Sales and distribution cost Transaction lifecycle cost Compliance and regulatory requirements costs (n=44) Cost of risk Information technology costs Other/various cost of operation Automation of processes Outsourcing Elimination of products and or business lines % 30% 40% 50% 60% 70% 80% 90% 100% No cost savings 1 to 2 % 3 to 4 % 5 to 6 % 7 to 8 % 11 to 15 % Don t know 64% % 5 5 Fig 11 Savings degree The responses from those who have initiated cost-cutting projects indicate that the cost savings from compliance and regulatory requirements costs are the ones that have been best sustained. For the remaining part, sustainability seems to be a challenge. The respondents seem to display a great deal of uncertainty regarding the savings sustainability, as a large share has replied Don t know. Q37: To which degree have savings been sustained for longer than 12 months when it comes to Cost of labour (n=18) Sales and distribution cost (n=14) Transaction lifecycle cost (n=12) Compliance and regulatory requirements costs (n=11) Cost of risk (n=11) Information technology costs (n=16) Other/various cost of operation (n=14) Automation of processes (n=15) Outsourcing (n=15) Elimination of products and or business lines (n=11) % 3 64% % 4 44% % 2 21% 2 0% 30% 40% 50% 60% 70% 80% 90% 100 % Cannot specify Don t know Not at all Partially Fully Fig 12 Cost-cutting initiatives duration There seems to be some uncertainty regarding the average duration of cost-cutting initiatives in the companies; the majority of the respondents don t know the length. Of those who do know, most of them responded 4 6 months. Q38: What is the average duration of cost-cutting initiatives in the company you work for? 4-6 months; 1 less than 3 months; 7-9 months; Don t know length; months; months; months; Longer; 14

15 Management consultants IT consultants HR consultants Accountants Specialisted cost management consultants % % % 30% 40% 50% 60% 70% 80% 90% 100% Not at all To some degree Significantly Don t know Fig 13 Degree of cost-cutting initiatives Overall, it seems that the companies have not made much use of external consultants, such as HR consultants or accountants. On average, 4 have not used any consultants. Q39: With regards to the cost-cutting initiatives, to which degree has the company you work for made use of: Lack of transparency on costs across the organization Difficulty in measuring cost savings Insufficient incentives to reward prudent cost management Organisation is primarily focused on growth Too much reliance on cost avoidance rather than increased cost efficiency Poor implementation of cost saving programs Insufficient investment in IT Negative publicity caused by cost saving measures Current organizational structure erodes cost-efficiency Too many conflicting projects Don't know 4% 4% 4% 4% st Rank 2nd Rank 3rd Rank % 1 Fig 14 Barriers in cost optimisation Overall, the largest barrier in cost optimisation is Lack of transparency across the organisation. The second largest barrier is Difficulty in measuring cost savings. Q40: What are the biggest barriers to optimising cost structures in your organisation? Improving process efficiency Better risk management Reducing service levels More competitive pricing on Outsourcing Using more cost-effective service channels Shared service centres Discontinuation of unprofitable funds Acquiring other companies to increase scale Organizational restructuring Alliances and joint ventures to share risk and cost Use of continuous improvement tools 1= Not at all 10= To a very large extent 31% negative 2 34% negative % negative negative negative 4 negative negative negative negative 2 4 negative negative 21% 1 2 0% 30% 40% 50% 60% 70% 80% 90% 100% Don't know 41% positive Avg positive positive % positive % positive % positive 21% % positive positive 4.4 positive % positive positive Fig 15 Cost management strategies Improving process efficiency is the most important cost management strategy over the next three years, while alliances and joint ventures to share risk and cost and reducing service levels are the least important strategies. Q41: How important will the following strategies be as part of your cost management over the next three years? 15

16 Fig 16 Aspects of cost management Greater process efficiency will be the most important aspect of cost management for the companies, but also other aspects such as cost reduction and increased cost-efficiency have great importance. Q42: How important do you expect the following aspects of cost management to be in the future for the company you work for? Cost reduction Cost avoidance (ie refraining from investment) Increased cost-efficiency More flexible cost structure shared services or outsourcing Greater process efficiency Greater operational efficiency through automation More rigorous cost-benefit analysis % % 21% % 4% 0% 30% 40% 50% 60% 70% 80% 90% 100% Very important Not at all important 1 Don t know 4% Avg Fig 17 Cost management Most respondents agree with the statement that Changing cost structures can be a source of long-term competitive advantage, while most disagree with the statement We find it very difficult to measure the success of changes to our cost structure. Q43: Please indicate whether you agree or disagree with the following statements. We find it very difficult to measure the success of changes to our cost structures A renewed focus on revenue growth has eroded discipline on cost efficiency in your firm Changing cost structures can be a source of long-term competitive advantage Rethinking cost structures successfully requires adjusting performance incentives Achieving a sustainable change in cost structures requires an extraordinary focus rather than a business as usual approach/attitude 2 60% % 6 44% 51% 31% 0% 30% 40% 50% 60% 70% 80% 90% 100% Don t Know Disagree Agree Fig 18 Cost structure trends It seems that increased competition is the trend that is most likely to increase pressure to rethink cost structure in the organisations. Also regulatory changes is likely to put pressure on the companies rethinking of their cost structure. Q44: How likely are the following trends to increase pressure to rethink cost structures in your organisation? Need to strengthen balance sheet Pressure from shareholders/investors Downward pressure on margins Need to fund growth Increased competition Increased tax costs Regulatory changes Shrinking assets 2 40% 34% % 4 40% 3 30% 40% 2 30% % 1 0% 30% 40% 50% 60% 70% 80% 90% 100% Not likely at all Somewhat likely Very likely Don t know 4% 16 Fig 19 Reasons for losses The majority of those who replied that their company had to absorb losses on behalf of their clients responded that this was a result of other things than the options already stated. Nevertheless, many replied that it was because of compliance breaches. Q48B: Were these losses as a result of: (n=25) Compliance breaches; Mandate breaches; 4% Wrong NAV calculation; Settlement errors; Don t know; Other; 40%

17 Review of internal cost structures Review of Operational efficiencies Effective measurement of costs using metric Benchmark comparison of cost verses peers 1= Not at all 10= To a very large extent 1 24% % % 1 4% 4% 4% 0% 30% 40% 50% 60% 70% 80% 90% 100% Don't know Prefer not to disclose Avg Fig 20 Extent of financial losses During the past two years, financial losses in the investment management industry have primarily lead to a review of operational efficiencies. Q45: Please state to what extent have financial losses during past two years in the investment management industry lead to: IT cost of operation Transaction cost per trade Implementation of regulatory requirements and compliance rules Sales and distribution cost Settlement cost Reconciliation of data cost STP rate Implementation of Investment strategies for multiple portfolios Cost associated with errors ( human or system reference data) Cost of client report production Cost of internal management report production Other % % 30% 40% 50% Fig 21 Cost measured The cost that most organisations measure is IT cost operations. Furthermore, organisations measure transaction cost per trade and implementation of regulatory requirements and compliance rules. Q46: Which of the following costs are measured by your organisation? IT cost of operation Transaction cost per trade Implementation of regulatory requirements and compliance rules Sales and distribution cost Implementation of Investment strategies for multiple portfolios Settlement cost Cost associated with errors ( human or system reference data) STP rate Reconciliation of data cost Cost of internal management report production Cost of client report production Other % 34% 3 0% 1 30% 3 40% Fig 22 Frequent and systematic monitoring One third of the organisations actively monitor IT cost of operation on a frequent and systematic basis. This makes it the cost that most organisations monitor. Furthermore, one third of the organisations actively monitor other costs. Q47: Of these, which do you actively monitor on a frequent and systematic basis? Yes; Don t know; No; 6 Fig 23 Losses absorbed on clients behalf Two thirds of the respondents reply that the company they work for has not had to absorb losses on clients behalf in the past year. Q48: Has the company you work for had to absorb losses on clients behalf in the past year? 17

18 Fig 24 Most used cost metric indicator Most organisations, one out of five, do not have any favourite cost metric indicators. Though many reply that their most used cost metric indicator is IT cost of operation. Q49: What is the most used cost metric indicator in your organisation? IT cost of operation Transaction cost per trade Implementation of Investment strategies for multiple client portfolios Sales and distribution cost Settlement cost Implementation of and adherence to regulatory requirements and compliance rules STP rate Reconciliation of data cost Cost associated with errors (human or system reference data) Cost of client report production Cost of internal management report production Other None of them 1% 1% Prefer not to disclose Don t know 1 0% 30% Q49. What is the most used cost metric indicator in your organization? B Fig 25 Benchmark cost metrics The top three cost metrics used for benchmarking are the same cost metrics as the most used indicators. This makes IT cost of operations the most used benchmark, with one out of four organisations using it, followed by Transaction cost per trade and Implementation of investment strategies for multiple client portfolios. Q50: Please state which cost metrics you use to benchmark the following functions to peers: IT cost of operation 2 Transaction cost per trade 21% Implementation of Investment strategies for multiple client portfolios Sales and distribution cost 1 Settlement cost 1 Cost of internal management report production 1 Reconciliation of data cost Cost associated with errors ( human or system reference data) Cost of client report production Implementation of and adherence to regulatory requirements and compliance rules STP rate Other 2 Prefer not to disclose 1 Don t know 1 0% 30% Fig 26 Investment style crossed with cost percentage It seems that investment managers that pursue an active equity or multi-boutique investment strategy are in general more profitable than those that pursue other strategies. Q14. Which best describes your investment style? Q7. May we ask, what the approximate annual revenue is of the company you work for? Q8. May we ask, what the approximate earnings before interest and tax (EBIT) is of the company you work for? (n=29) 8 or less More than 9 21% 21% % 30% 40% 50% 60% 70% 80% 90% 100% 50% 50% 6 6 Passive equity only Active equity only Passive fixed income only Active fixed income only Mixed portfolios with a high degree of OTC derivatives Mixed portfolios with a high degree of alternate investment or structured products A mix of the above/ multi boutique Other 100% 100% 100% 18

19 3 1 8 or less % % 3 3 More than 9 100% 0% 30% 40% 50% 60% 70% 80% 90% 100% More frequently than every 6 months Once every six months Once a year Once every two years Once every three years Once every five years Rarer than every 5 years Never (n=29) Fig 27 Cost structure review frequency crossed with cost percentage One fourth of those that review their cost structure once every six months seems to operate at the lowest cost ratios. There is a weak representation of investment managers that review their cost structure less often than once a year among the financial top performers. Q16. How often does your organisation review its cost structure? Q7. May we ask, what the approximate annual revenue is of the company you work for? Q8. May we ask, what the approximate earnings before interest and tax (EBIT) is of the company you work for? 100% 8 or less 100% % 24% % 100% More than 9 4 0% 30% 40% 50% 60% 70% 80% 90% 100% Lean Six Sigma Agile management Business Process Improvement (BPI) Lean Dynamics Total Quality Management Other, please specify No/None/Nothing/NA Don't Know Other Don t use any cost reduction methodology (n=29) Fig 28 Cost management methodologies crossed with cost percentage As illustrated, investment management companies that use Business Process Improvement and Lean Six Sigma all tend to be profitable, whereas other methodologies do not offer the same significant results. Q17. In your cost reduction, do you follow any particular cost reduction methodology such as? Q7. May we ask, what the approximate annual revenue is of the company you work for? Q8. May we ask, what the approximate earnings before interest and tax (EBIT) is of the company you work for? EDITOR Mette Riisgaard DISCLAIMER The content of this report is for general information and illustrative purposes only and will be used at your own risk. The findings in the report do not necessarily reflect the view of SimCorp Strategy- Lab. SimCorp StrategyLab will use all reasonable endeavours to ensure the accuracy of the information. However, SimCorp StrategyLab does not guarantee or warrant the accuracy or completeness, factual correctness or reliability of any information in this report and does not accept any liability for any errors or omission including any inaccuracies or typographical errors. All rights reserved SimCorp StrategyLab The contents of this report may be reproduced or transmitted with explicit reference to the report. 19

20 ADDRESS AND CONTACT DETAILS SimCorp StrategyLab c/o SimCorp A/S Weidekampsgade Copenhagen S Denmark info@simcorpstrategylab.com Professor Ingo Walter Director of SimCorp StrategyLab iwalter@simcorpstrategylab.com Lars Falkenberg Assistant Director of SimCorp StrategyLab lfalkenberg@simcorpstrategylab.com