Asset Manager Miss on 1bn€ Benefit

Asset managers in Europe could fatten their bottom lines by as much as €1 billion annually by retooling their company structures under the Ucits IV legislation. The new EU rules, when applied to asset firms, would allow them to shut down costly management companies that were previously required in every EU country. This can be done by bringing these separate structures under the control of a single company entity, according to the McKinsey. The consultancy estimates that every company could see earnings rise by close to 15 percent by taking advantage of these new rules.

The industry must change the way they operate, said Phillip Koch, a senior manager at the McKinsey consultancy. Companies must get on board and take advantage of these new regulations by cleaning up legacy business and changing moribund and out-of-date operating models, Koch added. The change will not only benefit asset management firms but also aid their customers. As it stands now, McKinsey estimated that the EU’s asset managers could raise profits by as much as €600 million annually by consolidating company operations and various supporting mechanisms. These now unnecessary functions typically drain 40 percent of a company’s business operating costs in the EU. The new regulations could save companies 15 percent on operating costs, the consultancy said.

Ucits IV legislation will allow asset mangers to dump or downgrade their in-country operations into branches that will be controlled by one company management division. This will omit the complexity of setting up multiple legal entities while conserving local distribution. McKinsey is estimating that this restructuring under the new Ucits rules would slash legal costs by as much as 20 percent. That would save €200 million annually across the sector. Clients in France are talking up these new rules. Companies are seeing that they can dump the compliance officers and risk officers at branches in order to save on accounting and legal fees, said Matteo Pacca, a McKinsey partner based in Paris.

Koch added that, in reality, a company branch simply doesn’t need the platoons of support personnel. Sales and distribution support is usually adequate at a branch. All else is duplication, Koch said.  McKinsey claimed that if asset management houses centralized operations, they would realize an additional €200 in profits annually as the result of better performance and economies of scale. Koch pointed out that houses that centralised functions related to investment were rewarded with net inflows of seven percent between 2009 and 2012. Those houses mired with diffuse structures saw outflows that totaled nine percent. “The performance uptick is really visible,” said Koch.

Although Ucits IV came online in 2011, most fund managers didn’t take advantage of the new rules because they feared losing business to competitors if they downgraded operations. Others believed that companies needed full scale operations in a country to be perceived as grounded and profitable. However, the lure of greater profits that can be realized by centralising operations and cutting duplicate staff will certainly draw more interest amongst EU asset managers.

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