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Staff Recruitment and Increased Regulation are the greatest challenges facing Asset Managers

31 January 2007 PricewaterhouseCoopers Inc

The investment management sector will confront enormous challenges in staffing and regulatory changes over the next few years, but the industry remains bullish about future revenue growth, according to the PricewaterhouseCoopers 2006 Global Investment Management Survey.

Pierre de Villiers, PwC Southern African investment management and real estate leader, says that survey respondents saw regulatory changes as the greatest and most immediate challenge, more so than recruitment and retaining the best employees.

Attracting, retaining and incentivising talent is one of the key issues presently facing the investment industry. There is great demand for talented portfolio managers and skilled risk professionals so this will put upward pressure on remuneration.

This could result in a change to compensation structures with more imaginative offerings coming into the industry as organisations consider more closely aligning investment managers interests with fund performance. But this type of strategy has the downside of perhaps leaving firms exposed to key man risk and staff departures.

Like the investment banks, fund managers are now increasingly being rewarded predominantly with performance-related bonuses for beating the market. This shorter term strategy is being adopted more frequently in preference to a long term technique of tying people to the industry through traditional compensation methods. Interestingly enough, it appears that the longer term compensation strategies are least likely to be adopted by the larger organisations.

The "quant houses" (those with a more quantitative and mathematical approach to investment decisions) have an advantage in the human resources area, as they are not so reliant on key individuals and carry less risk in terms of costs and the effects of high staff turnover.

The PwC global survey canvassed 81 investment management organisations of varying sizes and disciplines from around the world, representing $ 9 trillion of assets under management, and included 20 South African firms.

Respondents emphasised that the regulatory environment is becoming far more complex, and they are finding the sheer volume of preparatory work to be quite a challenge. Regulatory requirements are certainly not likely to decrease in the future as protective governments realise that the industry plays a significant role in the retirement savings of the individual.

In London, respondents cited the regulatory changes affecting them at present as those relating to anti-money laundering, financial crime laws, corporate governance requirements, international financial reporting and Basel II. In the US, respondents went so far as to say that stifling regulation was driving talented staff into areas of investment that were less regulated, such as hedge funds.

Players in the industry are rather sceptical of the benefits of increasing regulation. In the South African context, Zuhdi Abrahams, PwC Western Cape investment management and real estate leader, confirms that most local organisations believe regulation here is fairly comprehensive and has increased consumer confidence in the industry, but also has the negative effect of hindering cross border competition.

Other challenges facing the investment management industry include the development of innovative new products; investors moving to more personally tailored financial offerings; consolidation in distribution networks; and the impact of the Internet on the selling of products.

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