US mutual fund companies, under pressure from regulators to limit the fees they charge investors, are now being forced to cut costs by declining financial markets.
Management fees, which represent the bulk of these firms' revenues, were based on the assets of their mutual funds.
The stock market slump that began in July has reduced those assets and would lead to lower fees. This portends lower earnings - not to mention smaller pay packages for employees in 1999.
Fund companies are already starting to nibble away at their costs. Scudder Kemper Investments said it had imposed a hiring freeze until year end.
Pilgrim Baxter & Associates, a unit of United Asset Management (UAM), said last week it planned to cut about 50 jobs. Franklin Resources and Putnam Investments, a unit of Marsh & McLennan, said they were looking at ways to reduce expenses.
Fidelity Investments, the biggest US fund group, recently re-organised its institutional brokerage unit in a move to provide more services more cost effectively.
Cost pressures from the marketplace could not come at a worse time for management companies. The Securities and Exchange Commission (SEC) is studying the industry's fee structure, with results expected to be released in the first half of next year.
Analysts said they doubted the SEC would force fees down, but the findings of the study probably will keep a lid on them.
Putnam Lovell recently lowered their earnings estimates for T Rowe Price and some of the US's other big fund companies, including Franklin Resources.
UAM today reported that its third-quarter earnings were down 23 percent from the same year-earlier period, a decline slightly bigger than expected.
Some analysts said the volatile markets of the past three months had another side-effect: lower salaries for industry executives next year.
Lawrence Lieberman, the head of an industry recruiting firm, is predicting the average industry executive will get a 10 percent pay cut in 1999.
Richard Lannamann, the managing director at another recruiting firm, said: "For the first time in years, there's less confidence that every firm is looking to hire."
Shares of many money management companies already reflect the concerns about the earnings outlook. Shares of T Rowe Price are down about 24 percent since mid-July and shares of Franklin Resources are down about 28 percent - perhaps to bargain levels.
"The valuations of many money-management stocks were as cheap as they've been in years, and assuming the global equity markets stabilise, these stocks offer significant value," said Richard Strauss, an analyst at Goldman, Sachs who was recommending that clients buy shares of Charles Schwab and Franklin Resources.
Analysts say the markets are the most important factor in determining the strength of the industry's earnings. It's less easy to assess what will be the financial implications of the SEC's study on fees.
"I don't expect fees to be lowered as a result of regulatory pressures," Eberling said. "Industry competition could push them down, however."
SEC Chairman Arthur Levitt had been prodding fund companies to better disclose the fees they charge customers.
"We have a lot of work yet to do," said Levitt in a speech last week at Harvard University. He cited SEC research that indicated just 8 percent of investors completely understand the expenses their funds charge.
In these circumstances, only the bravest fund company would consider raising its fees to keep its profit up. - Bloomberg