The Dirty Little Secret About Asset Manager Mergers

Casey Quirk says that if done right, acquisitions can lead to lower costs and higher profitability — but they rarely go well.

Illustration by II

Illustration by II

Deal-making isn’t a cure-all for asset managers under pressure from rising costs and declining fees — if done poorly, it can do more harm than good, according to a new white paper from strategy consultant Casey Quirk.

M&A activity among asset managers is on the rise, but badly integrated acquisitions have added between $6 billion and $8 billion in new costs annually to the industry, Casey Quirk found.

“As these shifting competitive dynamics pressure profit margins, asset managers are turning to M&A as a way to defend their franchises, further raising interest in M&A. Yet there is little apparent correlation between a firm’s assets under management and profitability,” wrote the authors of the paper.

Still, according to Casey Quirk, asset managers are hunting for deals at record levels, in part because these transactions can have tremendous benefits when executed successfully.

Asset managers in the top quartile of a group of managers that Casey Quirk has identified as successfully integrated had organic growth of 3.5 percent over three years. The top quartile of managers that are not integrated grew at just 1.4 percent over the same time period.

In addition, firms that were integrated successfully boasted costs that were 8.5 percent lower and profitability that was 20 percent higher than their non-integrated peers, according to the asset management consultant. Integrated firms had margins of 35.6 percent, while non-integrated asset managers had margins of 29.6 percent.


Casey Quirk based the findings on recent research as well as its annual Performance Intelligence financial benchmarking survey of asset managers, conducted with compensation consultant McLagan.

[II Deep Dive: Just a Quarter of Asset Managers Growing Profitably, Study Finds]

Jeffrey Stakel, a principal with Casey Quirk and one of the co-authors of the white paper, said in an interview that for deals to go well, firms need to make tough decisions in four areas: senior management, distribution strategy, centralizing business functions, and technology.

“If you talk about M&A, it’s hard to get through a conversation without someone saying there aren’t many successful examples,” said Stakel. “But given the higher level of scrutiny on costs and the challenges facing asset managers, you’ll see a more purposeful approach to integration in M&A going forward.”

Stakel said when it comes to senior leadership, asset managers merging with other asset managers need to avoid co-CEO and other co-leader structures and reduce the number of mid-level executives. The end result can be a 60 percent reduction in personnel and related costs, according to the paper.

“It hasn’t been the norm to make tough decisions early and move to a single unified management team as quickly as possible,” Stakel said.

“Less integrated asset managers tend to have, on average, nearly twice the number of C-level executives employed by more fully integrated peers — usually resulting from a conscious decision to retain legacy executives,” the paper’s authors wrote.

Stakel provided statistics showing that the top quartile executive headcount for integrated firms was 9, compared with 35 for non-integrated firms.

Casey Quirk also said that firms that successfully integrate with other firms move quickly to unify and revamp distribution. The result can be a savings of 13 percent.

“Non-integrated firms have more professionals in traditional sales roles versus client service roles” said Stakel.

Asset managers have historically been cautious about making the needed changes required of successful acquisitions, the authors observed. “All asset managers dislike disrupting client-facing talent and their relationships with asset owners and intermediaries,” they wrote.

But successfully integrated firms that make changes are better at using new distribution technologies and are less specialized when it comes to getting their products in the hands of investors, the authors found.

Well-integrated firms also spend less than their peers on back- and middle-office operations, technology, compliance, risk management, legal and other support functions, according to Casey Quirk. That’s because they eliminate redundancies and the heightened risk of errors that come from duplicate infrastructure.

“Execution risk scares executives away from tackling large integration projects, fearing that botched or longer-than-expected work will create negative headlines and jeopardize client relationships,” wrote the report’s authors.

Casey Quirk documented, however, that successfully integrated firms were able to cut 10 percent from the costs of their enterprise and investment operations. These firms also cut technology costs by 14 percent by eliminating duplicative efforts.

The benefits of getting past these fears were too significant for the best firms to pass up, according to Casey Quirk.