Scale and performance are incompatible in asset management, or so claimed a report released today.
According to the report by Mercer Oliver Wyman and Lazard, the global asset management industry consists of two businesses – one serving ‘professional’ clients (whether institutional or retail) and the other serving ‘non-professional’ clients.
Customer needs and the business models are so fundamentally different that the industry will restructure around these segments, rather than the traditional institutional vs. retail split, according to the report.
In the ‘non-professional’ segment, scale and brand, rather than performance, will be the main drivers of success, leading to consolidation among providers, the report claimed. In contrast, performance will be the main differentiator in the ‘professional’ segment, leading to even greater fragmentation, it added.
The report finds that scale and performance are incompatible within the same business model, and, as a result, these two business models need to be managed separately going forward.
“We see successful asset managers making a clear separation between the ‘professional’ and ‘non-professional’ segments,” said Julia Hobart, a director at Mercer Oliver Wyman. “Different client needs require quite different business models, and few asset managers will be able to manage both simultaneously. Most large firms today are a blend of the two. This is unsustainable.”
The report identifies four types of business models that will characterize the successful asset managers of the future:
A small number of advantaged consolidators; scale managers with strong brand focussing on the ‘non-professional’ segment.
A large number of streamlined managers embedded within banks and insurers; these players will efficiently support distribution by focusing on a core product set, selectively outsourcing processing components and buying-in third-party specialist products.
A large number of Specialist boutiques; small, manager-owned investment houses who can generate performance, focussing on the ‘professional’ segment.
Only a few Alpha platform providers; large organisations built around autonomous investment teams replicating boutique organisation and performance, but also capturing the benefits of shared services