Regardless of asset class, sector or investment style, most boutique asset managers I meet with are grappling with three key problems that—for want of a more technical description—are keeping them awake at night. The issues don’t immediately threaten the viability of the business, but they do cast a deep shadow on profitability, growth prospects and long-term survival. Worse, from an emotional perspective, is that the problems (which often seem insoluble) sap the spirit of founders and firm leaders, killing the joy they felt when their businesses were starting out.
Here are the problems:
- Relentless fee compression;
- Sales and marketing efforts that rarely seem to pay off; and
- Technology that costs more but is increasingly ill-suited to current and future needs.
The good news is that these interrelated problems can be addressed successfully.
1. RELENTLESS FEE COMPRESSION
First, let’s start with fee compression.
Painful when it pinches — although great when, as a buyer, you are its beneficiary — fee compression is part of the DNA of the financial business. Few around now remember the many decades when retail commissions—now essentially non-existent—were lofty and fixed. Pressure from institutional investors forced change, which spawned innovation that over time transformed the brokerage and wealth management businesses. That’s just one example of where, in response to ongoing price erosion, nimble incumbents can survive and prosper by changing their operations.
Today, a variety of factors including the growth of passive investing are creating pricing pressure on active managers. For boutiques, fees have declined from roughly 125 basis points to 75 or 50 bps. Since there is little likelihood that fee levels will revert, boutique managers must respond to the new reality by capturing more assets and managing them more efficiently — which is hardly a eureka-like insight.
Where boutiques are having problems is in figuring out what to do in response, which leads to our two other problems:
2. UNFOCUSED SALES AND MARKETING EFFORTS
Hiring more wholesalers and amping up marketing efforts are time-tested ways to attract more assets and increase revenue, but have run into obstacles. With so many wholesalers clamoring for their attention, family offices and RIA firms are less inclined to agree to a meeting. Trying to capture their attention at industry conferences is no walk in the park either, as attendees hurry past expensive booth displays and avoid eye contact with a boutique’s representatives so as not to get stuck listening to a sales pitch.
Fortunately, today’s communications ecosystem provides a solution for boutiques that are willing to put the marketing cart before the sales horse and concentrate heavily on their area of expertise. In short, boutiques willing to go narrow and deep in their marketing by focusing intently on their specialty will find prospective buyers seeking out their specialized expertise or be open to speaking with a representative. With the whole world turning to Google any time they have a question, boutiques that can create a specialized library of expert, non-salesy content and draw attention to that content via social media can start to build a database of potential prospects for proactive content.
For firms whose basic website is occasionally updated with a media quote or company announcement, a shift to content-based marketing requires a shift in mindset and resources, as well as a commitment to seeing it through for the long-run. Marketing this way sets the stage for sales; it’s a slow-simmer method of heating up interest rather than a high-heat transactional approach.
3. MISGUIDED TECHNOLOGY INVESTMENT
Successfully implementing a more targeted marketing and sales approach, however, will only exacerbate the technology problems that many boutiques currently face. Often relying on legacy systems put in place when the firm was founded, the operational infrastructure at many boutiques is already cumbersome and costly to maintain and would be strained by greater volume. Cybersecurity issues and the difficulty of attracting tech personnel with experience in the sector are additional headaches, on top of rising costs.
Fortunately, just as in marketing, innovation has led to the availability of technology solutions for asset managers that are easier to use, more powerful and secure, and less expensive than the tools many boutiques now rely on. (Sweet revenge: Technology is an area where margin compression works in favor of asset managers.)
The rent-vs-buy choice of software as a service and the variety of cloud-based tools now available allow specialized solutions to be mixed and matched to meet a firm’s precise needs. The tools also can be plugged into whatever ecosystem of trading, recordkeeping, custodial and other services a boutique has assembled and currently uses. Outsourcing technology in this way does not represent throwing in the towel on building firm infrastructure but rather thinking strategically so as to concentrate resources in areas that add the most value.
In short, the three problems that plague so many boutique asset managers have solutions. Addressing the problems, however, requires rethinking long-standing assumptions and trying new approaches. Next time, we’ll look at how tech budgets can be reduced and how the diverted funds can be used in marketing.
Steven Lewczyk, a Managing Director at Flyer Financial Technologies, has helped asset managers of all sizes maximize the value of their marketing and technology spending. He welcomes and invites your comments and questions.
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