A money manager must do all of the technical jobs at an acceptable level just to get in the game. At a minimum, investors require money managers to be able to deliver risk-adjusted alpha at lower cost. We see possible disruptions where funds are highly leveraged, high volatility and highly concentrated. These funds cannot meet the minimum level of technical proficiency and cannot withstand withdrawals during significant down years. We see the average lifespan of a hedge fund is 5 years; within a three-year period about one-third of hedge funds disappear.
The cookie cutter approach to money management is no longer adequate. Today’s investor base is global and diverse along culture, gender and demographic lines driving unique investments needs. As a result, money managers will have to be able to adapt their business models and offer appropriately scaled service levels at the right cost.
Jobs at the emotional level create a deep connection with investors and lead to enduring relationships and improved economics through lower churn for managers and allocators alike. The ability to do the emotional jobs well can transform an asset manager into an institution - likely to scale and to stay in business for the long-term. We have found that customers may not clearly express or even openly admit that they value “emotional jobs” at the same level or higher to well known functional jobs. However, the money managers that perform these jobs well - jobs that may be more “social” or “experiential” - will consistently attract more assets.
Investors look for money managers with ability to make sense of the cacophony of information and disparate investment advice. Further, they need highly customized and often personalized help to shape their investment strategy, sorting signal from the noise. The high importance money holders place on customer service, therefore, calls into question the viability of technology-only investment platforms and the black box hedge fund model of “give me your money and wait for your annual report.” In the institutional space, Bridgewater has a “bend-over-backwards-for-clients” internal culture. Bridgewater offers both large, highly skilled client service teams and a proprietary analytics team. The client service teams are staffed with professionals capable for being portfolio managers in their own right, while the analytics research is provided to clients at no extra charge. In the retail space, in addition to expertise, investors value empathy in their financial advisors: “An empathetic financial advisor is one who truly listens to clients, ensuring they feel understood and who demonstrate that they care.” Joseph Reilly Jr., a private wealth advisor in Greenwich, Connecticut, says that advising people about money is being “part financial expert, part shrink, part friend and confidant, and part entertainer.”
Regulatory requirements and painful past experiences in money management (e.g., Madoff and other high profile frauds) have put transparency high on the priority list for institutional investors as well. According to the New York Times, “Earlier this year, a senior executive of the California Public Employees’ Retirement System, the country’s biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.” The investment agreements that institutional investors often give enormous leeway to managers to pass questionable costs on to their investors.. Recently, the Carlyle Group passed on their limited partners the cost of a $115 million settlement of a insider trading lawsuit - clearly a failure of its own internal management. The opacity of these arrangements creates an opportunity for companies such as Vitrio, Novus, and AcordIQ which provide technology platforms to institutional investors for systematic oversight of fund managers. Scott Evans, CIO of the New York City Retirement Systems, one of the largest public pension systems in the US, and other industry leaders are beginning to establish best practices around a revamped due-diligence and ongoing governance process to increase their insight and systematically build transparency in their investment programs.
That is not to say that all disruptive opportunities exist only in the emotional realm. In the retail space, investors have technical requirements - from wealth transfer to estate planning - that are broadly served by the private wealth managers. Interestingly, we found three specific functional needs that stand out as an underexplored opportunities for emerging disruptors:
At the institutional level, separately managed accounts and special purpose investment vehicles are gaining popularity as two ways to meet allocators technical or functional needs. For this group of investors, often with substantially divergent investment needs, we note two pressing needs: