Nearly 30% of fund administrators in Europe will experience a reduction in revenue in 2008, according to the Deloitte Fund Administration in Europe Survey 2008*. The outlook for 2009 is slightly better, with 24% of respondents predicting a further reduction in revenue next year. The funds administration industry (presentation) in Ireland alone employs over 9,000 people and has traditionally been a major recruiter of both graduates and experienced hires.
*Not available on the Deloitte site at time of our posting
The survey, compiled by Deloitte’s European Asset Management practice, which targeted third party fund administrators in their primary jurisdictions in Europe (Ireland, Luxembourg, the Channel Islands and the Isle of Man), shows that 44% of respondents are pessimistic about the short term outlook for the industry, 31% are optimistic with 25% neutral. However, when looking at a 2 year timeframe 85% are optimistic on the outlook for the industry.
Commenting on the results of the survey, Brian Forrester, Financial Services Partner at Deloitte Ireland and author of the report, said: “The mixed outlook over the short term indicates that the fund administration industry is feeling the pressure of the wider market turbulence. Ireland, as a major player within the administration industry, cannot expect to be immune from this. Already we have seen reductions in staff numbers here, and the emphasis for Irish administrators must be to assess their business models and act now to increase efficiencies in order to maintain service levels for their clients whilst managing their own profit margins which are under significant pressure.”
When asked how the credit crunch has affected the industry, the prime impact identified by respondents was the reduction in assets under administration – which impacts directly on administration fees earned. Unsurprisingly, the credit crunch was identified as the number one issue facing the industry. In October 2007, 95% of fund administrators in Ireland predicted little or no impact on their business from the credit crunch – what a difference a year makes!
The reduction in income along with a high fixed cost base is creating significant pressure on margins. For that reason, it is unsurprising that cost containment was identified as the second most important issue facing the industry. Maintaining service quality in the face of reducing costs and the subsequent need to improve productivity were identified as the third and fourth most significant issues facing the industry.
“Fund administrators are now facing a completely different set of challenges – the likes of which have not been experienced in recent times. Previous Deloitte research has indicated that the main challenges facing administrators have primarily been concerned with managing growth. That is no longer the case with the credit crunch being keenly felt by all administrators across Europe. As markets stabilise, investor preference is likely to shift to more conservative investment products that have been prevalent in recent times, which will require fund administrators who have invested heavily in the people and processes to support alternative asset classes to review how best to align their capabilities to this new, more conservative landscape,” said Brian Forrester.
The shift in sentiment in the industry and the resultant pressure to reduce costs, has led to a number of changing patterns with regards to staff levels. 83% of respondents believe that there will be a reduction in new hires compared to earlier predictions – which will be in stark contrast from previous years when there was a heavy reliance on both graduates and experienced resources. With regard to attrition levels, which have traditionally been high in the industry, 85% of respondents expect attrition levels to stay the same or reduce in 2008, rising to 87% in 2009.
A number of administrators have already commenced redundancy and redeployment programmes; however it is interesting to note that despite the downturn, experienced hire recruitment remains the number one HR challenge suggesting that strategic hiring is still taking place.
The increased pressure to reduce costs and create efficiencies has also led to an increased focus on offshoring and outsourcing with administrators moving elements of their operations either out of their home state or to specialist providers. Notwithstanding regulatory requirements to undertake certain activities in administrator’s home state (which differ between jurisdictions), significant moves have already been made in this area; however 50% of respondents believe that offshoring will continue to increase in the future, with 55% expecting an increase in outsourcing. This trend supports the continued move to create a global operating model.
Stuart Opp, Global Investment Management Leader at Deloitte said: “The findings of the survey show that the fund administration industry, like all segments of the broader asset management industry has been significantly impacted by the recent market volatility. Margin rationalisation is the order of the day now. Those administrators that are able to adapt their business model to reflect this - and do so quickly, will be the winners when markets stabilise. Administrators expect the current situation to ease in a 2 year time frame, and need to act now to position themselves to take advantage of their expected market recovery.”
About the survey
In 2006 and 2007 Deloitte carried out a survey of the Fund Administration community in Ireland, in order to obtain an understanding of the key business issues facing the industry. This year the survey was extended to include fund administration in Luxembourg and the Channel Islands (Jersey, Guernsey and the Isle of Man). The survey was carried out in November 2008. 73 companies providing fund administration services across Europe responded to the survey. The respondent fund administrators currently service nearly $4 trillion of assets which represents approximately 70% of the total industry in those countries.