The trajectory for asset management compensation continues to slip downward, dragged by cost pressures on companies and a shift to passive investing pushing the wider adoption of technology over managers.
Average total pay for managers has dropped almost 14% in three years, according to New York-based consultancy Johnson Associates' annual report on asset management industry compensation.
Pressure on asset management profit margins is driving these pay cuts, the firm notes. "The reality is that compensation is not likely to recover to recent market highs and might even fall further in coming years," says Johnson Associates managing director Francine McKenzie.
Source: Greenwich Associates
The impact of passive fund popularity has contributed to the trend, the consultancy notes. Vanguard founder Jack Bogle told Bloomberg News that the share of mutual funds under passive management could grow to as much as 45% within five years.
Source: Greenwich Associates
The industry witnessed a clear indication of this trend when BlackRock announced a number of portfolio manager layoffs in March, shifting assets from active managers into cheaper, algorithm-based strategies.
"We can more efficiently deliver alpha at a better cost with automated processes," Mark Wiseman, BlackRock's global head of active equities, told Bloomberg News.
The asset manager reported its passive funds took in $82.2 billion in net inflows this past quarter, while losing $1.8 billion from its active funds.
Executive recruiters, asking for anonymity citing ongoing worh with BlackRock, said its decision to fire managers and switch to automation will have a real impact on buy-side compensation trends, as other firms will have to mull similar action.
There's already a concern among managers that individual performance is being lost in the mix because of soft organizational business, Johnson Associates notes.
Survey respondents stated individual performance (30% to 50%) and organizational performance (50% to 70%) as a driver of their pay.
"As firm business results have sagged, professionals feel that downward pressure is outweighing the results of individual performance," according to Johnson Associates.
The report notes that managers haven't felt the level of pain that sales teams within asset management firms have experienced.
"Even several years of compensation reductions will not stop the flow of talent from the sell side, which sees the buy side as offering at least equal potential financially, with much better quality of life," said Kevin Kozlowski, an analyst with Greenwich Associates.
