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Survival of the Fittest Means Big Changes

arwinism is here with a vengeance," predicts a new research study co-conducted by KPMG International of London and CREATE Research, a research firm in Kent, U.K.

To survive, global investment management firms will need to change their fundamental mindset as well as their core practices, explained the new report, Revolutionary Shifts, Evolutionary Responses: Global Investment Management in the 2000s. Restructuring, rethinking business models and readjusting past practices are the keys to survival of the fittest.

The study surveyed 185 global investment management companies, 40% of which are expected to post a loss in 2003. Within that difficult environment, companies will need to change or "face terminal decline," according to the report.

So what ills have investment management firms committed? The lengthy bull market that ended in 2000 masked many "fault lines." The report's laundry list is long. The industry rolled out too many products regardless of investor needs. Companies were overly focused on attracting assets, and complexity ensued as a result of growth. Inefficiencies crept in. While investment performance took a dive, pay and bonuses skyrocketed, boosted by egotism and pay linked to growing assets. Moreover, strong leadership among firms was lacking as successful investment managers were mistaken for corporate leaders.

The result is that investors' significant disillusionment has made them more demanding of investment managers. Investors now seek real value, consistently higher performance, a brand they can trust, a more transparent investment process and tangible risk management.

Lean, Mean and Resilient

To cut costs and become lean, mean and resilient, firms will need to streamline product lines and reevaluate core strengths, according to the report. To accomplish this, investment managers should outsource non-core activities, consolidate activities into fewer platforms, foster a culture that shifts employees' mindsets from entitlement to performance and from short-term personal gain to long-term viability of the business. The report also recommends that investment firms link pay and bonuses to top-notch performance both of their investments and the larger corporation. "Running the business like a business has become the pre-condition for survival, even when markets recover," the report notes.

Of particular interest are shrinking payrolls, which make up a significant portion of a company's expenses. They have been trimmed and trimmed again, noted the report, with the largest cuts hitting the U.S. and the U.K. Four out of five investment firms have cut payroll budgets by slashing their staffs. Two in five have shifted their compensation programs so that bonuses are now linked to either team or individual performance. In these cases, bonuses linked to assets under management have become extinct.

While the development and implementation of novel variable pay schemes are the topic of the day, adoption is being implemented slowly and hesitantly. "The sacred cow of pay and bonuses is long overdue for slaughter," the report warned.

The report noted that large, medium and small investment firms have stopped paying guaranteed bonuses that don't depend on market conditions or individual performance. Some formerly guaranteed bonus agreements are being allowed to lapse while others are being "bought out," explained the survey.

KPMG recommended firms revamp pay to include low base pay but potentially higher bonuses, link bonuses to exceptional out-performance, offer an equity stake that would encourage wealth creation instead of focusing on annual income production and emphasize non-monetary benefits.

Copyright 2003 Thomson Media Inc. All Rights Reserved.