The Markets June 28, 2010

Asset Management Business Model Changing Since Downturn

A new study has found that asset management business models are in transition as the industry adapts to dominant investor concerns about liquidity and capital protection in a new, competitive landscape.
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Respondents to the independent study from CREATE-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors (Principal), estimate that asset growth will be dominated by significant rebalancing of existing allocations; with the volume of new money in motion remaining small.  

Over the next three years, only a third of assets will mark fresh inflows from sovereign wealth funds (SWF), national pension funds, central bank reserve funds and defined contributions (DC) and defined benefits (DB) plans, according to a press release. The rest will be switched assets from wholesale packagers, DC plans helped by the closure of DB plans, and outsourced insurance assets.  

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As a result, competition is expected to intensify further as money moves between geographic regions, asset classes and client segments.  

The press release said with an increasingly professional, more diverse and more demanding client base, asset managers are already improving their product proposition by enhancing capabilities in asset allocation (54%), absolute return (21%) and product innovation (53%). Furthermore, they are improving service standards and raising technical collaboration with consultants and fund platforms, to broaden distribution.  

In the United States, asset allocation will be a pragmatic blend of caution, diversification and (most importantly) opportunism. Rising investments in equities and bonds by sovereign wealth funds will favor big U.S. managers. American asset managers are becoming intent on cultivating a new generation of clients at home. With an expected market and asset new client growth of 32% in the next three years, North America will be the third most important growth point.  

Currently, the east is consuming more and saving less – while the west is saving more and consuming less. As a result, the U.S. will remain the epicenter of the global economy and the asset industry.  

The study examined the investment value chain and its competitive dynamics over the next three years and found that the U.S. had the greatest competitive edge relating to investment and administration. The outsourcing business model is one that has already been adapted and embraced by U.S. asset managers as they see the value of gaining efficiencies in a new, competitive landscape. The post-credit crisis environment has further spurred this trend. 

 

The Growth of Boutiques  

The press release said currently, 50% of asset houses operate as integrated producers. According to the study report titled “Exploiting uncertainty in investment markets,” the number will decline and multi-boutiques will become the dominant operating model among medium and large asset managers over the course of the next 10 years.  

Currently independent boutiques represent 7% and integrated boutiques represent 28% of the market.  

Furthermore, over the next three years a fiduciary overlay will differentiate the winners from the losers. Success will require asset managers to exercise ‘duty of care’ by developing a fiduciary overlay that delivers five things: consistent returns, a deep talent pool, exceptional service, a value-for-money fee structure, and a state of the art infrastructure. The overlay seeks a three-way financial and non-financial alignment between: asset managers and their clients; asset managers and their professionals; their professionals and clients.  

“Multi-boutiques are effective in dealing with two primary issues faced by investment managers. First, they can afford to build strong, consultative relationship management teams to work directly with clients in finding appropriate solutions to meet their needs. This aligns boutiques well to compete in a world where clients desire a more consultative approach to doing business. Second, they can effectively manage the diseconomies of scale faced by managers. This means that they are less prone to running out of capacity in capabilities of interest to clients,” said Barb McKenzie, Chief Operations Officer of Principal Global Investors, in the press release. 

“The new alignment of interest will have to cover not only financials like fees, charges and returns but also involve non-financials like service quality, product innovation, risk tools and operational excellence via outsourcing. For the second time in a decade asset managers are concentrating on their core capabilities and outsourcing the non-core areas,” said Neeraj Sahai, Global Head of Citi’s Securities and Fund Services. “Third party administrators are now building a new generation of platforms, with enhanced line speeds, scalability and multi-product capabilities. Post crisis, operational excellence is about doing new things to cope with the new reality, whilst also doing old things better.” 

 

The study report is available at http://www.create-research.co.uk.  

 

Compliance June 28, 2010

Financial Services Reform Compromise Reached

Last week, members of the House and Senate conference committee announced that they had reached a compromise on the new financial services reform bill.  

 

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Designed with the intention of preventing another market meltdown, protecting consumers from unfair lending agencies, and clarifying and correcting existing legislation, the bill promises significant change to the current practices of retirement plan advisers and financial service providers.  

The Securities and Exchange Commission (SEC) was given the authority to require brokers to put their clients’ interests first, a practice that is familiar to advisers. A six-month study of the brokerage industry, with specific attention paid to possible regulatory gaps or overlaps between brokers and investment advisors, will be conducted before any more significant changes are made. Within the next year, brokers who previously recommended “suitable” investments based on their clients’ financial goals and preferred risk level may be held to the fiduciary standard.  

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Under the terms of the legislation, the SEC also has the right to require private equity and hedge fund advisers to open their books for inspection. The SEC’s review may raise the threshold for customers as accredited investors, a designation currently given to “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase,” as well as several other qualified companies and plans1. 

The bill also created a new Federal Insurance Office within the Treasury that will monitor insurers who were previously regulated only by states. The FDIC’s authority to liquidate failed commercial banks was also extended to large financial firms whose collapse would have a greater negative impact on the economy.  

The bill was expected to be brought to a vote this week, potentially being signed by President Obama by July 4.  However, the passing of Senator Robert Byrd (D-West Virginia) this morning has, at least temporarily, put that timetable, if not the passage of the compromise bill itself, in question.    

For more information on the SEC’s definition of accredited investors, please visit http://www.sec.gov/answers/accred.htm. 

The bill can be seen in its entirety at http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf 

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