How can investment firms successfully reduce business costs?

Former abrdn managing director, Brett Jollie, shares why “cost-out” strategies are incumbent on investment firms.

Jollie, alongside Darragh Cleary, principal consultant at Kaizen Recruitment’s investment operations and accounting division, delved into the rise of firms adopting “cost-out” strategies to reduce their costs.

In October 2023, it was announced that Jollie had joined specialist investment and wealth management consultancy KONU as a partner, following his departure from abrdn in July 2023.

With the funds management industry seeing several role restructurings and redundancies in recent years, the two professionals outlined why firms are implementing these often-sudden changes.

According to Jollie, cost-out strategies refer to programs that seek to reduce the overall operating costs within a business by decreasing the cost per unit of output, ultimately strengthening the business’s productivity. The key drivers of these strategies relate to both macroeconomic and industry-specific factors.

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Cleary added that such strategies “strive to enhance productivity by optimising resources and processes, which should result in increased profits/profit margins”.

Assessing the funds management space, the extended underperformance of active managers was identified as a key area which has seen significant outflows and underpinned the need for cost optimisation. This has been caused by market volatility, declining investor sentiment, the shift to passive investment strategies and in-sourcing by asset owners, Cleary wrote.

“These dynamics have had an immediate and lasting impact on active managers’ revenue and profits. To protect margins, fund managers have been forced to cut costs and improve productivity,” Jollie commented.

As a result, the former abrdn CEO believes it is “incumbent” on investment firms to regularly seek cost savings and productivity gains.

For firms looking to adopt these strategies, Kaizen Recruitment highlighted five strategic areas to focus on: 

• People (including organisational structure, governance, teams and individuals)
• Operating model
• Technology and systems
• Commercial arrangements
• Product and distribution

However, firms are cautioned against slashing expenses too aggressively without corresponding gains in productivity – which could significantly hinder future growth prospects. Reducing staff and redundancies should also be “carefully weighed”, according to the recruitment firm, particularly when rehiring becomes a priority later on.

“Firms must also recognise the loss of experience and intellectual property, and the impact on client relationships, morale and company culture,” Jollie continued.

He added that these strategies require clear communication, cross-functional collaboration and ongoing monitoring to ensure long-term business success.

Jollie’s previous employer abrdn is currently in the process of its own cost-out strategy which is expected to result in the reduction of approximately 500 roles by 2025.  

The firm saw several departures in 2023, including Jollie and portfolio managers Michelle Lopez and Natalie Tam, due to SG Hiscock becoming its wholesale distribution partner and management changes of its Australian equities funds moving to the company.

Speaking last April, the firm said: “The decision to refocus the local abrdn business is in response to the increasingly competitive nature of the Australian market and the need for greater local scale to be successful in delivering the best outcomes for Australian clients.”