The Five Keys to the Future of Asset Management by Peter Hans, President and Co-Founder, Harvest
In order to sustain, one must evolve. In order to grow, one must evolve faster.
I started my Wall Street career in 2000 trading short duration bonds, primarily interest rate derivatives. Products like these are what “Wall St.” has historically deemed as innovation. The synthetic creation of products such as CDOs, and CDOs of CDOs, and CDOs of CDOs of CDOs, is a form of innovation; however, lasting innovation serves to improve the value proposition for the end consumer. Most Wall Street investment product innovation simply serves to increase fee revenue further perpetuating mistrust.
Despite the differences between the asset management industry and the investment banks which create and sell “innovative products,” they are broadly viewed as synonymous. Plus, their major pain points are the same: high customer acquisition costs, and the subsequent difficulties in achieving economies of scale. Managing money for a fee, and selling financial products to a diverse client base, are inherently scalable businesses; however, acquiring and maintaining clients is exceedingly expensive and currently reliant on intermediaries.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
As we know, banks sought to achieve operating leverage through the cross-selling of new “innovations,” as opposed to targeting a more efficient work flow. One might assume that the asset management industry would learn from the mistakes of the banks, but instead of treating the disease and high costs, managers instead focus on the unsustainable Band-Aid of supporting margin via high, and opaque fees. Excessive fees, in the absence of branded differentiation, create an unsustainable business, especially for an industry with the inherent volatility of active portfolio management.
The asset management industry is in the midst of a dangerous combination of mistrust, a lack of transparency, a lack of brand differentiation, and a corresponding questionable value proposition. These characteristics have helped to spur real innovation in the form of competing companies and product offerings. From the introduction of ETFs and on-line brokerage, to recent start-ups aimed at displacement, such as Wealthfront, Motif, and Robinhood, the asset management industry faces significant threat. This threat also comes at the worst possible time.
There is an estimated $60T wealth transfer already underway, and global high-net worth and mass affluent wealth is projected to top $100T in the next five years. The next generation of investors will hold significant wealth, are highly informed, and place emphasis on attributes that are currently glaring weaknesses for most financial advisors and active portfolio managers.
There are a handful of advisors and managers who are evolving by focusing on communication, networks, social impact, transparency, and the establishment of a brand offering expertise and differentiation. Those who are evolving will be best positioned to flourish, those who don’t keep pace will atrophy, and those who refuse to evolve will disappear.
Call me an optimist, but we should have confidence that the broader asset management industry is merely slow, not stupid. Thus, the question managers must be asking themselves is, what are the key trends to capitalize on, and what will the industry look like in the next 10 years?
Asset Management – Key Trends:
- A bifurcation of global and regional asset managers
- A growing focus on brand establishment and differentiation
- A mass adoption of technology for improved efficiency, communication, data, and client engagement
- A shifting focus from expensive intermediaries to scalable lead generation, client acquisition, customer service, and retention
- A more simple and transparent fee structure leading to easier communication of differentiation, consumer trust, and an environment of manager meritocracy
- Bifurcation – Any asset gatherer will tell you that raising money is hard. You can find the stats anywhere, but roughly speaking 95% of AUM is managed by 5% of funds. Much of this discrepancy is due to misaligned incentives and high corresponding customer acquisition costs. But regardless of the reason, it’s the reality, a reality that only perpetuates the problem. As a result we are seeing the large become increasingly global with diverse product and service offerings. Large mutual fund complexes and large managers of hedge funds and other alternatives are beginning to look the same, and in the near future there will be little differentiation. Simultaneously, the barriers to entry for a small manager are zero, but the barriers to scale remain high. As a result we will continue to see small and emerging managers compete on a more regional level with a highly specialized and differentiated product offering. These entities will also need to focus on scalable asset gathering from regional advisors, or directly from HNWIs in the form of a master fund or separately managed accounts.
- Brand differentiation – Regardless of size, the need for brand awareness and differentiation will be paramount. The managers and advisors who best succeed in the future will be the ones to effectively educate their target client base on who they are, what they stand for, and what differentiates them from competition. The best manager marketing will serve to educate potential clients thereby solidifying the manager’s subject matter expertise and differentiation while working to establish client engagement and trust. In the near future, managers will differentiate between IR, PR, and marketing, and the most successful managers will have considerable resources devoted to all three efforts.
- Technology – Asset management has severely lagged other industries when it comes to adoption of new technologies; however, with an increased focus on cyber security, compliance, and cost/efficiency solutions, technology adoption will become mission critical to growth in the asset management industry. There are opportunities abound in data mining and visualization, customer acquisition solutions, client engagement and retention solutions, as well as a number of applications for enhanced internal efficiency and communication. It will soon become the norm for an asset manager to employ a CTO, a Digital Marketing Officer, and a Social Media Coordinator.
- Economies of Scale – Excessive management fees can be directly attributed to unsustainably high customer acquisition costs. Through adoption of technology and scalable digital marketing, managers will be able to more efficiently grow AUM. Additional adoption of new communication technologies focusing on security, compliance, and client workflow will lead to enhanced client engagement, trust, retention, and network growth. Smaller, more regionally focused investment managers, increasingly targeting a growing but fragmented HNWI client base, will also require a more scalable and sustainable means of client outreach and communication. The most scalable customer acquisition models will allow individual and smaller institutional investors to seamlessly discover the financial expertise, products, and services that are right for them. As an efficient marketplace(s) of financial product buyers and sellers is established, data will be accessed in order to further inform the financial firm allowing them to best target clients with the highest likelihood of converting. Additionally, unlike today’s fears of data being used against the consumer, data in this case will be transparently offered, and disclosed for the mutual benefit of both sides of the transaction. As a result, cold calling and LinkedIn spam messages will meet a very welcomed death.
- The most innovative financial companies have shared a single characteristic that is at odds with much of the opaque culture of Wall St., transparency. Firms such as Charles Schwab, Vanguard, and iShares, all attacked consumer pain points by offering a high quality, and far more transparent product, for a fraction of the cost. Now it’s very possible that higher levels of service, or more differentiated offerings from more expensive alternatives are worth the price discrepancy; however, in the absence of information, a consumer can only assume that it isn’t. We are currently seeing similar attempts at displacement in the form of Wealthfront, Robinhood, and Motif Investing. My prediction; however, is that traditional active management will survive by evolving into a culture built on transparency, communication, and a differentiated offering; and all with a more straightforward and clear fee structure based on the level of service a customer seeks. Just as ETFs eventually became a compliment to the active management industry, and a powerful tool of the investment advisor, Robo-Advisors will become a key product offering for financial advisors, and the cost of executing equity trades will continue to approach zero for all.
As these predicted trends become more of a reality an environment of transparent expertise will be established. This will allow financial professionals to enter the market, compete, and grow based on the value of the services that they provide. This will ultimately lead to a better value proposition for the manager, as well as the client. Ultimately, this will lead to something that “Wall St.” hasn’t seen in a long time, true, lasting, innovation.