“Clients are very nervous”

“Clients are very nervous”

28 Aug 2015

Like many people, I hoped and almost believed that the financial services industry would reform itself after the global disaster for which it was largely responsible. Sadly, there is plenty of evidence that the “leaders” of the financial community are merely waiting to resume their old behaviour. No one appears to be trying very hard to stop them and, if one can stay out jail (and almost everyone does!), taking advantage of stupid but solvent people is very lucrative. As that schoolboy joke goes:

“Why does a dog lick its own private parts?”

“Because it can”.

And so to this week’s story about the giant asset management firm Pimco.  A story on Bloomberg states that Pimco’s assets under management peaked at $2.04 trillion in March 2013 but subsequently declined by almost 25 percent. Pimco’s funds have not performed as well in the last two or three years as they did in the past and its two most high profile names, Mohamed El-Erian and Bill Gross, both left in 2014, with rumours that they had fallen out (with each other).

Senior staff at Pimco were partly paid (in cashable internal currency known as “M shares”) on the basis of the firm’s profitability which is dependent on fee income which naturally rises and falls with funds under management. According to Bloomberg, Bill Gross “took home” $290 million in 2013 (a real hunter-gatherer of the 21st century).

As the funds’ performances have faltered and the funds under management have declined the group’s profitability has fallen and the performance award has turned south. This is how capitalism works you might justifiably say to yourself: and these financial superstars must understand and even appreciate that: this, surely, is the game they have chosen to play. But wait! Not so fast there!

According to the impressively well-informed Bloomberg reporter, “clients are very nervous”. Are they nervous because they are paying top performance fees for mediocre performance? No! They are scared that the threat of lower rewards will motivate their money managers to take their talents elsewhere. According to Mary Childs (she’s the journalist in the pink cocktail dress if you watch the video), it is too much to expect that Pimco can match the “ridiculous” growth targets of the past. So what to do?

The answer is to introduce a new performance scheme described by Mary as “stay here and we’ll pay you”. To be quite clear, in order to receive this bonus the employee must stay at the firm for three years or thirty six months or one hundred and fifty six long, long weeks. As the Bloomberg article says with admirable restraint:

“The new long-term incentive plan replacing the M shares tilts compensation for top managers away from growth and toward guaranteed payouts.”

Ladies and gentlemen, looks like we’ve got us a tilt and an enviable one at that. The occupation of money management is being de-emphasised in favour of the occupation of a desk in an office. (Is this what the Occupy movement had in mind? I don’t think so). And the challenge of sticking it out should not be airily dismissed. Pimco’s HQ is located at Newport Beach, California. You might (again!) struggle to see the problem. So let’s check in with Mary the Pink Panther again. It seems that Newport Beach is “not quite the cultural centre that New York City is”.

At this point I must gently demur. According to visitnewportbeach.com there is plenty going on. There is an art gallery, an annual film festival and Shakespeare by the sea (though seats are hard to come by due to the sheer volume of culture-starved money managers with zircon credit cards and sharp elbows). I’m not sure I buy the notion that the threat of a culture-seeking exodus hovers over Pimco. How many successful Wall St interviewees have cited the proximity of the Metropolitan Opera House in their list of reasons for wanting the job?

This spurious justification for retention payments makes me wonder at the keenness of Bloomberg’s journalist to give them such a free pass. If financial journalists follow the industry line and frankly patronise its customers with such insultingly feeble arguments, why do they exist? Why do they think they exist?

Egotistical and avaricious financial “experts” line their pockets because they can. I understand that. It disgusts me but I understand it. The fawning journalists also set off feelings of nausea in me but their inactions are beyond my comprehension.

One comment

  1. Cherith /

    How can anything be beyond your comprehension? You answered it with the word fawning surely?
    I am not surprised that you left this environment. I doubt it will change, even with more powerful women there.

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