Recent and future changes to the financial services landscape provide both significant opportunities and threats to the asset management industry.
More so than in the last 20 years, this is highly likely to lead to distinct winners and losers, as only some asset managers are able to make the required changes to their business models.
The biggest change they need to address is that currently we tend to think in terms of ‘inputs’ into a client’s portfolio rather than always addressing the output the customer actually requires. We obsess about the quality of the ingredients into a meal rather than whether the final dish itself is delicious.
Outcomes, not inputs
Therefore we need to shift from thinking of how managers exceed an index benchmark or whether one fund has outperformed another, to what particular outcome the client would find useful to help them build their asset ‘pot’ or deliver a level of income.
The whole language within the industry has to move away from discussing specific classes of bonds, equities or other assets and instead deal with the provision of outcome-based solutions that allow for the accumulation of an asset pool, the de-accumulation of that pool and even for the two processes to exist simultaneously.
I believe clients are fundamentally not interested in a specific bond or equity market, or whether it’s a high or low alpha product, let alone whether it’s an alpha or beta product at all.
This lexicon has suited the fund management industry as it’s currently structured as it attempts to develop ‘innovative’ products that facilitate a sell into the marketplace.
However, this does not help the end consumer as they view a bewildering array of choice that doesn’t address their genuine requirements.
What is required are different types of ‘packaged’ yet relatively simple and transparent products.
The bigger picture
An analogy would be a carmaker that, instead of focusing upon the various components of a car, shifts its mind-set to the production of different types of car that have different speed settings or other options.
While this will be more complex for fund managers to deliver, those that can clearly set their business model up to achieve this should be the winners in a landscape where there should be considerably more assets to manage.
However, those who stay wedded to the pushing of old-style funds that target specific inputs, will, I believe, increasingly struggle as the money flows elsewhere.