NICSA East Coast Conference

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NICSA East Coast Conference

• Investment Management Finance
• What Does It Really Cost?
• January 15, 2009

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Investment Management Finance What Does It
Really Cost?

• Agenda
• Session overview update on issues facing the
  industry
• Business overview key industry insights
• Business implications
• Questions
• Conclusion

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Our Panel

• Moderator Walter Mengden
• Executive Director, Business Advisory Services,
  Ernst Young LLP
• Jeb B. Doggett, CFA
• Partner Casey, Quirk Associates
• Douglas P. Martyn
• Director, Financial Analysis and Reporting
  Babson Capital Management
• Christopher E. Saulnier
• Vice President, Corporate Treasurer Pioneer
  Investment Management USA

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Session Overview Update on Issues Facing the
Industry
The current business climate and continued
pressure on investment management performance
have combined to force investment management
firms to better control revenue and cost.

• Credit / liquidity crisis
• Financial services consolidation / concentration
• Unprecedented asset value decline
• Recession
• Loss of investor confidence
• Fed sees longer economic decline

Source Wall Street Journal Online. Crude Oil as
of 12/28/07
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Business Overview Key Industry Insights

• Asset management companies operating profits may
  decline by 35 in 2008
• 2009 profits will depend on the interplay of
• Asset flows
• Asset mix and exposure to equities
• Trade-offs between incentive compensation,
  headcount and profitability
• Incentive pools and headcount are the largest
  expense type and are expected to decline
• Trend toward achieving scale, reducing complexity
  and focusing on core revenue streams
• Industry may face reduced profit margins for an
  extended period of time and will need to adjust
  their operating models accordingly

Source Industry Profitability Under Siege,
Casey, Quirk Associates, November 2008
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How do we Measure Profitability?

• Assess the current state
• Profitability by team, product, distribution
  channel
• Measure contribution margin
• Compare functional cost vs. benchmarks
• SWOT Sub-scale? Capacity? Low hanging fruit?
• Cost of doing nothing
• Impact of lower margins
• Identify alternatives to improve profitability
  (e.g., offshoring, product merger, investment
  strategy exit)
• Framework for decision analysis
• Relevant v. non-relevant costs/revenues fixed,
  variable, implementation, step-wise
• Optimal decision bottom line impact ,strategy
  congruent
• Audit of results v. assessment

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Business Implications Operating Model
Considerations

• Mergers, acquisitions and divestitures
• Distribution model
• Sales and marketing
• Product simplification
• Portfolio management
• Research and analysis
• Client / investor services
• Operations
• Compliance and risk management
• Administration and overhead

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Business Implications Cost Improvement
Considerations

• External spend / procurement
• Cash / liquidity management
• Incentive compensation / Headcount
• Consolidation of back office functions
• Consolidation / merging funds / reducing
  shareholder classes
• IT infrastructure and investments
• Real estate / facilities
• Outsourcing / insourcing

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Conclusion

• Asset managers can take immediate and long term
  steps to improve profitability
• Companies that quickly adapt to the new economic
  reality will have an advantage
• Be prepared for lower profit margins
• Retaining key talent is important to success
• Regulatory oversight and compliance activities
  will likely increase

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