In an effort to avoid the risk posed by “star managers” who can take assets with them when they leave, asset management firms are instead trying to build investment teams, says Moody’s Investors Service in a new report.
Asset management firms are increasingly placing greater emphasis on “succession planning and compensation as they seek to create deep team cultures, the credit rating agency says in the report, which it sees as a positive by reducing “key person risk.”
“The recent losses of star managers including, PIMCO and Waddell & Reed, have highlighted the impact that the loss of a key individual or group from a firm can have on a firm’s business franchise, its brand and, eventually, its financial performance,” the Moody’s report says. “Deepening the bench has become a central priority for larger asset managers, making succession planning more relevant than ever.”
To facilitate the shift away from stars to teams, firms are investing “in ways to ensure knowledge is shared across teams,” the report says. Additionally, asset managers are using compensation models and incentives to prevent managers from leaving.
“Beyond creating a succession plan, the most effective defense against high level departures for asset managers has been incentivizing compensation. Managers offer the carrot of an equity ownership but hold the stick by deferred or contingent compensation and non-competes,” says Ram Sri-Saravanapavaan, associate analyst at Moody’s, in a statement.
Firms are also shifting their cultures away from the traditional model focused on a star manager to a team culture. “Firms are doing this by building infrastructure, policies and procedures that focus on proven investment processes that are transparent to investors and in turn significantly reducing their exposure,” the Moody’s report says.