The costs of the wrong culture

Intriguing article in last week's FTfm section (the Financial Times's weekly review of the Fund Management Industry) on an unpublished draft report from IBM's Institute for Business Value that states:

"The document, seen by FTfm, claims the industry is 'paid too much for the value it delivers' and that 'destroying value for clients and shareholders is unsustainable'".

The report goes on to warn of large headcount reductions in sell side research, credit rating agencies research, traders, fund of hedge funds, hedge funds, traditional portfolio managers, and financial advisers.

The question is, in an industry that is allegedly singularly motivated by delivering return on investment, how is there so much slack in the system? Beyond any discernible business reason, the fund management industry seems to have a culture that tolerates massive waste, duplication, and value destruction.

According to FTfm, the unpublished IBM report puts a figure of '$1,300bn' on this egregious waste. Getting this culture more aligned with strategy has the potential for huge cost savings and much greater client and shareholder value.

Update: Peter Elston, investment strategist at Aberdeen Asset Management Asia, defends the industry here by arguing that (i) the costs of slack in the system are overstated and (ii) acceptable when compared to the potential privatised benefits of beating the market. 

Does Vickers Commission Interim Report change the conversation?

So the Independent Commission on Banking has provided an answer to one of the big questions raised by the financial crisis. We can't stop a repeat but we can mitigate its impact.

Despite the predictable sound and fury around the Interim Report from the ICB, the big banks seem to have won the argument for resisting a break up. The Commission's structural approach is to inject more competition into the high street banking sector, ring-fence retail from investment operations, and make the cost of capital more realistic.

Intriguingly, these changes may have significant effects on banks' culture although this is not explicitly mentioned by Vickers.

• Greater high street competition will drive transparency on fees, simplicity in products, and improved customer service
• Ring-fencing the retail operations, even if some cross-subsidisation remains, will help the high street side push back against the higher risk-takers from the investment side
• More market-rate capital will undermine the 'fingers-in-the-till' mentality of the investment side using the retail side as a source of cheap credit

Unless George Osborne perpetrates an even larger Government U-turn than tuition fees, most of the Vickers recommendations will ultimately change the governance culture of the banking sector. Whether this is for the better depends on the small print, as ever. However, Vickers seems like the tentative beginnings of a new conversation for UK Banking. Should we tell the cheering bankers that they aren't out of the woods yet?