The ramifications of the global financial crisis are broad and deep, especially for the financial services industry, and super funds need to be well aware of how their service providers are being impacted.
One of the least-well appreciated ways that funds may be affected, according to Stephen van Eyk, is in the breakdown of certain managerial controls which could follow the merger of divisions or business units among large managers and banks.
The managing director of van Eyk Research observes that in many large organisations forms of Chinese walls have evolved between divisions, under different heads of department, which may be servicing the same clients. What happens to these walls when departments merge and staff are rationalised?
The natural competition between executives and business units within the same firm can act as a counterbalance which works in the client fund’s interests. The fund can receive separate informal advice from an insider’s perspective on the quality of the service or price.
One of the many aspects of the current crisis which sets it apart from those of the past 75 years is the willingness of large financial institutions to retrench senior executives. In some cases this may be motivated by a sense of fairness, to spread the pain evenly. But more often the motivation is to reduce managerial duplication, especially in areas of operations other than sales or production. That said, no positions seem safe at the moment.
Redemptions, declining funds under management, present a more obvious signal of trouble ahead irrespective of whether this is performance related. There are plenty of funds suffering redemptions simply because they are more liquid than others in a client’s portfolio.
Discrete mandates provide some comfort but do not completely quarantine clients from the effects of declining funds under management for their managers.
There are so many risks facing super funds this year that manager strength and stability may not be high on everyone’s list of concerns.
However, the staff cuts and other cost-saving schemes by managers make you wonder what sort of financial services industry will be left when markets recover and the economy returns to good health.
It will no doubt be smaller. But if the industry as a whole does not add value, as academics and index managers generally point out, that may not be a bad thing.