Directly speaking, there is no doubt that the investment management space is being hit by the most disruptive series of forces in its history. Commercially, fees are being driven down, regulatory requirements have become increasing complex, compliance frameworks are under constant scrutiny, high infrastructure costs are driving accelerated outsourcing trends, distribution channels have become expensive and highly selective, and investment management strategies strive to become differentiated.
The Financial Times reports that new money moving into hedge funds dropped significantly last year, while ETFs grew. Vanguard founder, Jack Bogle, has predicted that hedge funds will never recover to surpass the ETF industry, blaming the shift on “deep disenchantment with hedge funds among large investors” based on high fees and poor performance.
Rather than look into a crystal ball to see the future, managers are looking in the mirror, wondering who they are and how to make money. “Discount brokerage has driven the cost of transactions to zero, ETF’s have driven the cost of investment management to zero, and digital advice is driving the cost of financial advice to zero,” our friends at Tiburon Advisors explain. What’s an advisor to do?
The trends of transparency and lower cost securities are extremely broad, penetrating waves of change, leaving no sector untouched. Consumers desire safe, describable, non-correlated yet predictable returns. They also want their choices presented to them across all digital and human channels, at increasingly lower costs. Alternative investments, fueled by the resurgence of private equity, can’t hide from these impactful trends, but have made a permanent place in asset allocations, institutional and retail alike. In their recent report (“The Future of Private Equity”) SEI warns that private equity is “well on its way to becoming mainstream”, a thought distant just a decade ago.
At Paddock Consultancy, we find ourselves in the midst of fund operations rising to a glamour spot as a result of investment managers’ increasing reliance on partners to help with growth strategies, expense control, cybersecurity, and regulatory assistance. Nearly every aspect of a manager’s infrastructure is on the table for outsourcing. Fund administrators, particularly in private equity funds, are looking to grow their product suite, geography or target markets. Investors like private equity funds are looking to invest in firms who appear to achieve and sustain revenue returns appealing to institutional investors. The monthly league table reports from Convergence reflect the changes in rankings from administrators moving up and down (or out) due to consolidation plays…another trend we follow.
In the robo markets, there is no stopping the proliferation of investment information and choices served to consumers across a digital platform. This is not a simple Millennial consumer trend, but as reported in these pages previously, is evidence that low cost securities perform as well as actively managed ones and need to be distributed in low cost, but not cheap, ways. Robo 2.0 adds the human touch to these digital products, and advisors are quickly adding access to a financial advisor within their digital platform, at no additional cost. Response to demand.
DTS kasina echoes that concept in their recent paper (“Capitalizing on Disruption: Transforming Asset Management for 2020”), stating, “As it is now, critical gaps need to be closed between client needs and product features, between distribution models and distributor demands, and between marketing practices and client expectations. Many asset managers are not yet positioned to support the evolving requirements of professional buyers and investors as we approach 2020.”
Finally, we recently had an incredible chance to spend time with the good folks from Harvard astrophysics department, The Weather Channel, Beacon Hill Institute and the meteorology department of Suffolk University. We explored the impact of weather on investment trends and selection, and the inconsistencies in public data being released by presumed esteemed organizations such as our national weather bureau – clearly information that’s relied on across consumer, manufacturing, economic, agriculture and energy sectors. It’s nice to have your head in the clouds from time to time…’til then.