Wednesday 13 April 2011

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article in last week's FTfm section (the Financial Times's weekly review of the Fund Management Industry) on an unpublished draft report from IBM's Institute for Business Value that states: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According to FTfm, the unpublished IBM report puts a figure of '$1,300bn' on this egregious waste.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. 

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