CaseyQuirk
by Deloitte.
The Complete Firm 2013:
Competing for the
21st Century Investor
The investment management industry’s revenue growth will continue to slow, with net
flows accounting for less than 1% of annual growth worldwide between now and 2017,
compared to organic growth rates of between 6% and 7% per annum before the crisis.
Nevertheless, there will be substantial opportunities in key segments and strategies. Five
key drivers will account for virtually all positive impact on revenue growth during the next
five years:
• Continuing “democratization” of alternative investments
• Increasing popularity of customized and packaged investment
solutions
• Globalizing portfolios
• Growing assets of wealthy individuals
• The rise of investors in emerging markets
Nearly 90% of new industry revenues between now and 2017 will accrue to a select group of
firms able to capably deliver one or more of four key value propositions to investors:
• High-alpha active management
• Cost-efficient beta
• Asset allocation expertise
• Solutions-led distribution
A substantial portion of the industry’s current competitors face the threat of irrelevance unless
they undertake substantive change. Firms that do not offer any of the four key value
propositions will only attract 10% of the industry’s net new revenues and lose significant
market share between now and 2017.
Today’s asset managers can transform themselves into tomorrow’s Complete Firms by:
• Delivering investments leadership in a “difficult to differentiate” environment
• Organizing well-led and resourced sales/marketing efforts that foster growth
• Building a technically skilled client interface for client cultivation and retention
• Implementing incentives that aggressively attract and retain talent
• Instituting governance and ownership practices that support long-term
dynamism
Table of Contents
1.
Introduction:
A Changing, Maturing Industry ....................2
2.
Slowing Revenue Growth ............................3
3.
A Concentrating Industry ............................11
4.
Prologue to the Complete Firm ....................15
5.
The Complete Firm 2013 ..........................20
6.
Conclusion ..............................................30
Authorship
Authors:
Kevin P. Quirk, Principal
Benjamin F. Phillips, Investment Management
Lead Strategist - Consulting
Contributors:
John F. Casey, former Chairman at Casey Quirk
Daniel Celeghin, Head of Wealth Management
Strategy Asia-Pacific
Yariv Itah, Casey Quirk Global Practice Leader
Jonathan H. Feldman, former Director of
Research at Casey Quirk
Jeffrey A. Levi, Principal
Supporting Team:
Michael D. Chia, former Manager at Casey
Quirk
Dan Neeman, former Senior Associate at
Casey Quirk
Jacob F. Walker, former Senior Associate at
Casey Quirk
Sheryle D. Wells, former Marketing Associate
at Casey Quirk
CaseyQuirk
by Deloitte.
Casey Quirk by Deloitte helps clients develop broad
business growth strategies, improve investment/
product appeal and growth prospects, evaluate new
market and product opportunities, and enhance
incentive alignment structures. Our unparalleled
industry knowledge and experience, detailed
proprietary data, and global network of relationships
make Casey Quirk by Deloitte a leading advisor to the
owners and senior executives of investment
management firms in the world.
The Complete Firm 2013: Competing for the 21st Century Investor
1
Introduction: A Changing, Maturing Industry
The global asset management industry remains vibrant and profitable, generating an estimated
$350 billion of revenue and more than $100 billion of earnings worldwide in 2012. The 2008
financial crisis, however, loudly marked the end of the industry’s adolescent growth spurt. Going
forward, four key changes to the operating environment will define opportunity and challenge in
the global asset management industry:
•
Organic industry growth will slow, with expansion from net new flows dropping from
between 6% and 7% annually before the crisis to less than 1% for each of the next five years.
Changing investor sentiments and shifting asset allocations will define opportunity going
forward. The resulting changes in competitive dynamics will favor select products and client
segments, and transform others into turnover-driven takeaway games.
•
Investors will concentrate their business with asset management firms that add value
in one of four clear ways, reflecting growing investor concern over outcomes rather than
benchmarks in an increasingly low-return environment, as well as a desire for global
portfolios less correlated to the broader market.
•
Competition will become even fiercer, with a larger number of industry laggards falling
further behind a select group of successful competitors. Winners will differ in scale,
and comprise both new entrants and (some) existing market leaders, but will share a
few common characteristics related to their operating and ownership principles.
•
Finally, given oversupply in the industry, asset management firms that fail to execute five
strategic initiatives will become increasingly irrelevant to investors and stakeholders.
Those that do succeed will be investment management businesses we call Complete Firms —
able to meet increasingly high client and stakeholder expectations regarding not only
investments, but also distribution and business management.
Exhibit 1
Key White Paper Sections
2
1
Revenue
Growth Slows
4
3
A Concentrating
Industry
Success
Factors Evident
• Exogenous
• Complete Firms
• Factors correlating
factors re-shape
the industry
• New revenue
opportunities will
be targeted
consolidate new
revenue share
• Challenged firms
increasingly
less relevant
• Four primary
value propositions
more strongly with
higher growth
and/or profitability…
• …show the potential
path forward
The Complete
Firm 2013
• Five strategic
initiatives for success
• The Complete
Firm 2013 Checklist
• Charting the path
to success
The Complete Firm 2013: Competing for the 21st Century Investor
2
Subsequent sections of this white paper will describe each of these changes in detail, outlining
how asset management firms can, and should, transform themselves into tomorrow’s market
leaders. The success principles in this paper are often extensions of concepts first introduced in
our earlier Success in Investment Management series, but reflect the fact that the operating
environment has changed dramatically in the last 10 years.
Slowing Revenue Growth
The 2008 financial crisis and its aftermath accelerated a number of secular trends that have
been dampening the industry’s long-term revenue growth.
Exhibit 2
Exogenous Pressures on Long-Term Asset Management Industry Revenue Growth
Diverging
investor/
client
demographics
Shifting
product/
investment
demand
Evolving
intermediaries
Slower
industry
revenue
growth
New
investment
frameworks
Low return/
volatile capital
markets
These exogenous forces are very long-term in nature and already familiar to many
readers; five of them can be summarized as follows:
1.
Diverging investor and client demographics. Post-war baby boomers in major developed
markets are retiring, withdrawing their accumulated savings from pension and welfare
systems that states and corporations are increasingly unwilling to fund for younger
generations with less aggregate savings to deploy. New flows in developed markets will come
from investors who have grown up in less attractive market conditions than their babyboomer parents did; in emerging markets, younger investors making their first foray into
investments will drive organic growth. Both demographic trends will impact product demand.
The Complete Firm 2013: Competing for the 21st Century Investor
3
2. Evolving intermediaries. The number of intermediaries for asset management products and
services — retail and private banks, insurers, brokerages, and asset consultants — continues to
shrink as aftershocks from the financial crisis spur weaker players to consolidate. More
importantly, as other lines of business (such as investment banking) become less lucrative for
large global financial conglomerates, they have placed greater emphasis on operations that
generate asset-based, non-cyclical cash flows — such as distributing asset management
products and offering wealth management services. Intermediaries globally are becoming
professional buyers: more selective in the asset managers they choose to distribute, more
competitive in terms of the asset allocation advice they provide, and more expensive in terms
of revenue-sharing and retrocessions.
3. Low return/volatile capital markets. Between 1988 and 2000, fueled by bull markets in
global equities, the average global 60/40 balanced portfolio grew 10% compounded annually.
Since 2000, as interest rates tumbled to historic lows in major economies and stock markets
gyrated amid uncertain macroeconomic signals, a similar 60/40 portfolio has only appreciated
5% compounded annually, with higher volatility. The mighty tailwind that propelled industry
growth for much of its modern history is now sputtering.
4. New investment frameworks. In the emerging low-return environment, institutional
investors and professional buyers are re-examining the approach they take to strategic asset
allocation. Relative return is necessary but not sufficient; less correlated, more absolute, riskadjusted performance increasingly characterizes an investor’s evaluation criteria. Investors also
now design components of their portfolios around objectives such as growth or liability
management, rather than simply around asset classes such as equities and bonds. This new
perspective will continue to blur lines of demarcation between traditional and alternative
managers, as both attempt to provide the outcomes clients seek. This also means that more
complex offerings create new challenges in educating, and communicating with, investors.
5. Shifting product demands. Implementing these new investment frameworks has led many
advisors to consider hiring asset managers with different investment skills, and deploying
those capabilities within the portfolio in different ways. The changing product set will include
more passive instruments, a wider use of hedging strategies and illiquid investments, and
greater reliance on more tactical approaches to asset allocation.
The Complete Firm 2013: Competing for the 21st Century Investor
4
All five forces already have started to constrict net inflows into the global asset management
industry. In the years immediately preceding the crisis, the industry’s assets under management
grew between 6% and 7% a year organically, before accounting for market gains or losses. But
between year-end 2007 and 2011, assets expanded less than 1% from net new money, and will
grow less than 1% a year between now and 2017.
E
Exhibit 3
Estimated Global Asset Management Industry Net New Flows
Net Flows as % of Beginning AUM
9%
8%
7%
6.9%
6.9%
6.3%
6%
5%
4%
3%
2%
1.0%
1%
0.4%
0.5%
0.6%
2011
2012–2017
0%
-1%
-1.3%
-2%
2005
2006
2007
2008
2009
2010
Sources: Morningstar Direct, Strategic Insight, eVestment, HFR, Casey Quirk by Deloitte Global Demand Model
These five trends also have reshaped portfolios
worldwide, as investors continue to execute broad,
strategic shifts in their investment philosophies and
outlook. New money will favor more innovative
investment strategies and capabilities, while competition
within traditional asset classes will create a turnoverdriven takeaway game.
New money will favor
more innovative
investment strategies and
capabilities, while
competition within
traditional asset classes
will create a turnoverdriven takeaway game.
The Complete Firm 2013: Competing for the 21st Century Investor
5
Exhibit 4
Global Asset Management Industry Revenue Drivers, 2012-2017E
$500
Industry Revenue ($B)
$483
$450
$117
$400
$9
$7
$4
$4
-$27
$17
$350
$352
Detractors:
Domestic equities
Pensions
Developed markets
Other, net
-$15B
-$4B
-$2B
-$6B
$0
2012
Alternatives Emerging Globalizing Individuals
Revenue
Investors
Portfolio
Solutions Other Mix
Capital
2017E
Shifts and Appreciation Revenue
Overlap
Source: Casey Quirk by Deloitte Global Demand Model
This reallocation will impact industry revenue composition dramatically. Annual industry revenues
will rise to almost $500 billion by 2017 from slightly more than $350 billion at year-end 2012, but
more than 80% of that growth will come from estimated capital appreciation of 5.9%
compounded annually. Net new revenues will exceed $40 billion between now and yearend 2017, driven by five organic growth catalysts:
Net new revenues will
exceed $40 billion
between now and yearend 2017, driven by five
organic growth
catalysts.
alternative investments, investors in emerging markets,
globalizing portfolios, rising wealth among individual
investors, and the growing prevalence of packaged and
assembled investment solutions. These changes will
replace revenues lost from plummeting allocations to
traditional, long-only domestic equity and fixed income
products, as well as maturing and shrinking pension
systems in developed economies.
The Complete Firm 2013: Competing for the 21st Century Investor
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Exhibit 5
Global Asset Management Industry Revenue Opportunity by Asset Class, 2012-2017E
Global AUM
Global Net
New Flows
Global Revenue
Opportunity
Projected 2013 –2017E
Projected 2013 –2017E
2012
Alternatives
15%
Solutions
Passive Fixed
7%
5%
Passive Equity
10%
Global Equity
15%
Global Fixed
6%
Local Fixed
22%
Net
Winners
37%
Alternatives
Solutions
37%
Passive Fixed
Passive Equity
Global
21%
Global/Intl Equity
Global/Intl Fl
38%
EMD
EME
Domestic
42%
Local Equity
% of Total
20%
Local Other Fl
25%
Local High Yield
Local Core/Core Plus
Local Equity
2012
-$4 -$3 -$2 -$1 $0
$1
$2
-$50 -$0 -$50 -$100 $150
($T)
($B)
■ Flows
■ Turnover
Note: Revenue opportunity is the sum of revenue available each year from manager turnover and net
flows. Source: Casey Quirk by Deloitte Global Demand Model
1.
Alternative investments. Investors increasingly regard “alternative” investments — including
unlisted securities, hedging strategies, derivatives and innovative structuring — as mainstream,
better described as the result of evolving skills in active asset management. Alternative asset
managers increasingly will compete with their long-only counterparts for larger core mandates
from institutional investors focused on reducing correlation and portfolios designed around
desired outcomes. Importantly, professional buyers will help further “democratize” alternative
and hedge fund strategies, with mass-affluent and high-net-worth investors representing most
of the growth in alternative investments assets between now and 2017.
The Complete Firm 2013: Competing for the 21st Century Investor
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Exhibit 6
Global Alternatives AUM CAGR, 2012-2017E
Mass Affluent
Individuals
10.2%
High-Net-Worth
Individuals
Institutional
Total Industry
9.3%
7.7%
8.6%
Source: Casey Quirk by Deloitte Global Demand Model
2.
Investors from emerging markets. Institutional and particularly individual investors in
emerging markets are the asset management industry’s newest and fastest-growing
customers, benefiting immediately from post-crisis global shifts in capital, but largely driven
by long-term demographics. Asset management marketplaces in developed economies will
remain large but fail to grow, and competitive dynamics will become more zero-sum as a
result.
The Complete Firm 2013: Competing for the 21st Century Investor
8
Exhibit 7
5-Year Net New Flow as % of Beginning AUM
Global Revenue Opportunity by Region and Client Type, 2012-2017E
40%
Latin America Indiv.
35%
ets
ark
M
n
ts
ive
rke
-dr
Ma
ws
o
n
l
e
F
v
dri
erov
n
r
u
rT
ge
na
a
M
Latin America Instl.
30%
25%
Asia ex-Japan Indiv.
20%
Asia ex-Japan Instl.
15%
Europe DC
10%
Middle East Indiv.
Size of Bubble: 2013-2017
Revenue Opportunity
N. America Indiv.
Australia DC
Australia Instl.
5%
● Institutional
● Individual
● DC
Europe Indiv. N. America Instl.
● = $5 billion
Australia Indiv.
0%
Europe Instl.
Middle East Instl.
-5%
Japan Indiv.
-10%
N. America DC
Japan Instl.
-15%
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
$55
$60
$130 $135
Manager Turnover Revenue Opportunity ($B)
Note: DC markets broken out of institutional for U.S., Europe and Australia only. DC in other markets resides in
institutional. Source: Casey Quirk by Deloitte Global Demand Model
3. Globalizing portfolios. Institutional investors and professional buyers worldwide continue
to move toward global benchmarks and asset allocation structures, seeking to diversify
geographically to maximize appreciation and yield, as well as tap faster-growing emerging
markets as investment destinations. This shift will come at the expense of lower-fee
single-country portfolios that largely focus on domestic securities, particularly affecting
U.S. asset managers without global or international product sets.
4. Wealthy individuals. Individuals, not institutions, will drive future revenue growth. Wealthmanagement clients with between $5 million and $30 million of investable assets will shape
opportunities for the next five years, as boomers remove accumulated savings from pension
plans in developed economies, estate transfers rise in frequency and size, and newly minted
entrepreneurs and business owners in developing economies sell their family businesses and
reinvest the proceeds. Four-fifths of new industry revenues between 2012 and 2017 will come
from individuals.
The Complete Firm 2013: Competing for the 21st Century Investor
9
Exhibit 8
Global Asset Management Industry Revenues from Individual Investors
Individual-Led Global Revenues
% of Global Net New Revenues
Projected 2012 – 2017E, ($B)
Projected 2012 –2017E
$135
Mass Affluent
$191
5-Year CAGR
$91
6.7%
$64
8.0%
Institutional
Channels
19%
$66
High-Net-Worth
$45
Ultra
High-Net-Worth
$24
2012
$36
7.4%
2017
6.5% Industry Average
Individual
Channels
81%
Note: Institutional channels include defined benefit, defined contribution and sovereign wealth
funds. Source: Casey Quirk by Deloitte Global Demand Model
5.
Solutions. An often used, but poorly defined, industry buzzword, “solutions” in this context
refers to packaged and assembled multi-asset and asset allocation portfolios designed to
reduce correlation to market indices, provide a more certain investment outcome, or both.
Four specific types of packaged solutions — target-date retirement funds, multi-asset class
products, liability-driven investment portfolios and outsourced chief investment officer (OCIO)
structures — will represent some of the industry’s faster-growing product and service
segments for the next five years.
The Complete Firm 2013: Competing for the 21st Century Investor
10
E
Exhibit 9
Global Revenue Opportunity ($M)
Global Asset Management Industry Revenue Opportunity from Solutions Portfolios
5-Year CAGR: +8%
OCIO
LDI
Multi-Asset
(MACS)
TDRF
% of Global Revenue Opportunity=
$5,570
$739
• Outsourced CIO: investments outsourcing will experience sharp
growth, largely from corporate defined benefit plans and E&Fs
$1,137
• Liability-driven investing: mounting pension obligations will
spur LDI, particularly in the defined benefit channel
$2,140
• Multi-asset class solutions: tactical asset allocation funds
geared towards low correlation of returns will drive MACS
revenue growth
$1,553
• Target-date retirement funds: U.S. target-date retirement funds
will drive nearly half of solutions revenue growth as they expand
their dominance in defined contribution plans
$3,753
$456
$829
$1,694
$774
2012
2017
4.6%
5.0%
Note: Revenue opportunity is the sum of revenue available each year from manager turnover and net new
flows. Source: Casey Quirk by Deloitte Global Demand Model
These five forces will create significant new revenue opportunities. As the industry matures,
however, asset management firms worldwide will face changing, and more challenging,
competitive dynamics.
A Concentrating Industry
Slowing revenue growth throughout the industry will
highlight oversupply: too many asset management firms,
oriented toward the wrong products and segments, will
chase fewer opportunities. Net new revenues will accrue
to a smaller set of firms — likely including some, but not
all, of today’s industry leaders — that adapt to meet
Net new revenues
will accrue to a smaller
set of firms — likely
including some, but not
all, of today’s industry
leaders — that adapt to
meet changing investor
requirements.
changing investor requirements. Clients will seek one or
more of four winning value propositions from their asset
management firms going forward:
The Complete Firm 2013: Competing for the 21st Century Investor
11
Exhibit 10
Valid Value Propositions
2
1
Value
Proposition
Definition
Challenged
Firms
High-Alpha
Active
Management
3
Cost-Efficient
Beta
4
Asset
Allocation
Expertise
Solutions-Led
Distributors
At-scale provider of
relatively uncorrelated,
high-tracking-error
equity, or fixed income
products, and/or
alternatives capabilities
At-scale provider
of ETF or index
products at
competitive fees
Credible manufacturer
of multi-asset class
products and services
(e.g., MACS, LDI,
TDRF, OCIO)
Firm specializing
in distributing
open-architecture
multi-asset class
products, allocation
products, and
allocation services
(limited to
no manufacturing)
Undifferentiated
active managers
Expensive
beta
Siloed
capabilities
Undifferentiated
distributors
1. High-alpha active management: offering at-scale, relatively uncorrelated, high-trackingerror investment skills and capabilities, often designed for sheer outperformance in a lowgrowth environment. Elusive, uncorrelated alpha still will attract most of a client’s fee budget
and, therefore, represents the industry’s most substantial revenue opportunity. Generating
less-correlated alpha increasingly requires investment skills that support more complex
portfolios (i.e., less liquid, global, with multiple legal, tax and accounting dimensions), favoring
the continued growth of alternative investments. The size of the opportunity for strong longonly liquid portfolio providers remains vast for those asset management firms that can
provide sustainable returns.
2. Cost-efficient beta: benchmark returns at competitive fees and/or within innovative
packaging, such as exchange-traded funds (ETFs). ETF proliferation underscores the true cost
of beta, which makes the market for index returns highly efficient, favoring scale players able
to maximize their operating leverage. In the six years since December 2006, investors have
raised their exposure to passive portfolios and ETFs to 18% from 12%, helping to spur a 15%
compression in long-only fees within the global asset management industry.
The Complete Firm 2013: Competing for the 21st Century Investor
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Exhibit 11
Global Asset Management Industry Assets Invested Passively, 2006-2012
Asset-Weighted Average Industry Fees
46 bps
40 bps
88%
85%
39 bps
82%
Mix Shift
Within Active
-5 bps
Mix Shift
to Passive
-2 bps
12%
15%
18%
12/06
12/09
9/12
■ Active AUM
2006 –2012
Mix-Driven
Fee Compression
-7 bps
■ Passive AUM
Source: Strategic Insight, eVestment, Casey Quirk by Deloitte analysis
3. Asset allocation expertise: credible capabilities in designing and implementing multi-asset
products and services, particularly if they can transform broad ranges of components
into higher-performing, outcome-oriented portfolios. Of the four value propositions, asset
allocation expertise is the one clients most desire, but it is the industry’s least developed.
Likely leaders will be quantitative firms and asset management operations that become
proficient at offering solutions.
4. Solutions-led distribution: open-architecture, packaged multi-asset, and total portfolio
products, leveraging third-party asset managers for most or all of the required investment
components. Under closer client scrutiny, distributors of asset management products will face
growing pressure to differentiate their offerings and provide end users with outcomes. The
ability to offer such differentiated advice at scale — be it through a wealth manage-ment
platform, institutional outsourced CIO (OCIO) business, or other form of assembled portfolio
— will represent substantial competitive advantage. Additionally, more integrated providers,
such as retail banks, will realize focusing on competitive distribution rather than creating
products represents a more attractive competitive option, given their natural skill sets.
The Complete Firm 2013: Competing for the 21st Century Investor
13
Firms offering one or more of these value propositions will stand apart from a broad array of
existing asset managers who cannot meet investors’ new demands. These challenged firms are
characterized by any or all of the following:
•
Low-tracking-error, benchmark-hugging portfolios with management fees that
consume most of their thin relative returns
•
Beta overpriced compared to peers in an increasingly efficient market for index returns
•
Asset managers with wide, but siloed, ranges of investment capabilities
•
Distributors and packagers that blend multiple subadvisors with similar capabilities, or
offer subadvised funds with little or no added intellectual capital.
Since the crisis, asset management firms offering one or more of these four value propositions
have appealed to changing investors worldwide and, consequently, have outgrown their peers in
terms of assets under management and revenue. Between now and 2017, firms with valid value
propositions will account for 90% of new industry revenues, and eventually comprise the
majority of industry-wide revenues. Firms lacking valid propositions will lose considerable
business — both from new opportunities and turnover — to firms that successfully lead with one
or more of these differentiators. Outflows from challenged firms to those with well-defined value
propositions nearly offset all the challenged firms’ gains from expected capital appreciation.
Exhibit 12
Global Asset Management Industry Revenues by Value Proposition
Compound Annual Revenue
Growth by Value Proposition
Share of
Revenue Growth
Industry Revenue
Breakdown
2008 –2011
2012–2017E
2011–2017E
Solutions-Led
Distributors
28%
Cost-Efficient
Beta
22%
High-Alpha
Active Management
58%
55%
42%
2011
2017
90%
Successful
Value
Propositions
17%
Asset Allocation
Expertise
Challenged
Firms
Successful
Firms
45%
15%
4%
Challenged Firms
10%
2012-2017
Challenged
Value
Propositions
Note: Multi-capability firms have revenues represented in multiple value proposition categories (there may be successful firm and
challenged firm capabilities that reside within the same firm); data represents $31 trillion in firm assets under management globally
(retail, defined contribution and institutional assets).
Source: Casey Quirk by Deloitte analysis
The Complete Firm 2013: Competing for the 21st Century Investor
14
Industry economics will consolidate around skill, not
necessarily scale, going forward. In fact, smaller, younger
firms, built solely around valid value propositions, will
eclipse some current industry leaders hobbled by large,
legacy books of business centered on outmoded products
and less attractive client segments. More importantly, only
a subset of the industry’s firms will have the operating
model elements required to successfully support one, or
several, valid value propositions going forward.
Only a subset of the
industry’s firms will have
the operating model
elements required to
successfully support one,
or several, valid value
propositions going
forward.
Prologue to the Complete Firm
Our proprietary research and substantial advisory experience with investment management
firms can help identify some of these operating model elements. The difference between winners
and losers among the world’s asset managers is now stark, having widened since the crisis. While
the industry continues to post strong average operating margins, struggling firms have
experienced increasingly lower margins when compared to rivals better able to maintain strong
growth trajectories.
Exhibit 13
Operating Margins Among Global Asset Managers
50%
45%
45%
44%
Operating Margin (%)
41%
40%
35%
37%
◆
34%
◆
39%
35%
37%
◆
36%
35%
30%
30%
◆
30%
28%
26%
32%
◆
◆
◆
25%
23%
20%
◆
Median
23%
20%
21%
21%
18%
25th
15%
Median
10%
75th
2005
2006
2007
2008
2009
2010
2011
Note: 2011 sample includes 88 U.S. and non-U.S. asset management firms.
Source: U.S./European Institute/Casey Quirk by Deloitte/McLagan Performance Intelligence Survey
The Complete Firm 2013: Competing for the 21st Century Investor
15
Successful asset management firms share five key ingredients, success factors that we believe are
likely to persist going forward, and form the foundation for the prescriptive framework that
follows. They are:
Factor 1: Investment brand strength. In a relative-return meritocracy, brand matters less;
in the more complicated world of the future, it may matter more, as investors begin to look
toward products in development, rather than products on the shelf. Firms with greater
perceived than actual performance secured a sizable amount of business from U.S.
institutional investors. These firms grew just as fast as firms that actually offered competitive
performance — but lacked the perception of doing so. Additionally, brand will play a key role
in attracting business from individual investors, which (as described earlier) represent most
of the industry’s revenue opportunity for the next five years.
Exhibit 14
Impact of Performance and Investments Brand on Growth, U.S. Institutional Marketplace
% of Firms
Star
Performers
Investment
Specialists
Strong
Brand
Performance
Perceived
Actual
% Group
Flows
Avg. 3-Year Flows as % of BoP AUM
10%
High
High
Low
High
High
Low
Low
Low
87%
23%
35%
45%
38%
20%
43%
46%
35%
Under
Performers
-5%
-7%
100%
Note: Perceived performance based on survey of 600 U.S. institutional investors asked to rate 36 managers on investment performance.
Actual performance calculated as % of AUM in top 30% ranked products and weighted as a blend of 1-, 3,- and 5-year peer group % rank
(25%, 60%, 15%) for the three-year period ended 6/30/12.
Sources: Cogent Research, eVestment, Pensions & Investments, Casey Quirk by Deloitte analysis
Factor 2: Appropriate sales staffing. The previous conventional wisdom held that sales
productivity — i.e., the same person selling more business — drove top-line growth, implying
asset management was a highly scalable business. Successful firms, however, realized that
more complicated client needs and the need to tap more labor-intensive revenue
opportunities meant manpower would provide a critical advantage. Since the crisis, firms with
large numbers of salespeople have substantially outgrown rivals with smaller distribution
groups, and even outpaced the growth of highly efficient sales and marketing organizations.
The Complete Firm 2013: Competing for the 21st Century Investor
16
Exhibit 15
Average Annual AUM Growth Rate by Key Efficiency Ratios, 2009-2011
By Sales Staffing
By Sales Productivity
Sales Professionals % of Total Front Office
Gross Sales/Sales Professionals
7%
7%
6.1%
6%
Avg AUM Growth (%)
Avg AUM Growth (%)
6%
5%
4%
3.0%
3%
2%
5%
4.3%
4.3%
Middle 50%
Top
Quartile
4%
3.1%
3%
2%
1.2%
1%
1%
0%
0%
Bottom
Quartile
Middle 50%
Top
Quartile
Bottom
Quartile
Source: U.S./European Institute/Casey Quirk by Deloitte/McLagan Performance Intelligence
Factor 3: Proper incentives. Franchise-value currency reflecting the asset
management organization, not any parent bank or insurer, has been a success factor
across multiple samples and timeframes. Firms that award equity, either real or
synthetic, in asset management operations handily outgrow competitors.
The Complete Firm 2013: Competing for the 21st Century Investor
17
Exhibit 16
Median AUM CAGR by Incentive Scheme Format, 2001-2011
Manager-Level Equity
10.7%
8.4%
Parent-Level Equity
Long-Term (no equity)
8.1%
Short-Term
6.2%
0%
2%
4%
6%
8%
10%
12%
Note: Based on 125 firms with outside owners and over $10B in AUM. AUM excludes cash and liquidity products.
Manager-Level Equity: Firms with equity programs in the asset management firm.
Parent-Level Equity: Firms with an equity program– typically at the owner level–but no equity in the asset management firm.
Long-Term (no equity): Firms with long-term incentives (i.e., deferred comp or profit-sharing) and no equity program.
Short-Term: Firms with no long-term incentive programs.
Sources: eVestment, Casey Quirk by Deloitte analysis
Factor 4: A global platform. Firms gathering more than one-third of their client assets from
outside their home region grow much faster than single-region counterparts. Perhaps more
importantly, in recent years these fully globalized firms have posted higher profit margins than
their less global counterparts, as long-term investments in business infrastructure begin to
bear fruit. Many asset management firms have relied on existing operating leverage in their
globalization efforts. Those with broad foreign client bases, however, have built a sustainable,
profitable business over time by investing in the regional products and distribution support
that allow them to compete more effectively with local competitors.
The Complete Firm 2013: Competing for the 21st Century Investor
18
Exhibit 17
Revenue on Net New Flows
Operating Margins
2007 through 2011
As of 2011
40%
30%
37.5%
25.2%
35%
25%
32.3%
20%
15%
10%
5%
2.3%
0%
Operating Margin (%)
Revenue on Net New Flows (% of Beginning)
Key Metrics of Asset Management Firms by Proportion of Foreign Clients
30%
28.9%
25%
20%
15%
10%
5%
–1.3%
-5%
0%
Regional Partially Global Fully Global
<5%
5-33%
>33%
foreignforeignforeignclient AUM client AUM
client AUM
Regional Partially Global Fully Global
<5%
5-33%
>33%
foreignforeignforeignclient AUM client AUM
client AUM
Sources: eVestment, Casey Quirk by Deloitte analysis
Factor 5: Operating autonomy. The crisis has emphasized the competitive advantages
of pure-play asset managers, over the partially or fully owned subsidiaries of larger
financial institutions. They can offer the more competitive incentives described earlier and,
consequently, appeal to professional buyers. Data show that subsidiary asset managers
can overcome these challenges, but only with innovative compensation systems coupled
with empowered enterprise-wide leadership.
The Complete Firm 2013: Competing for the 21st Century Investor
19
Exhibit 18
Median AUM CAGR by Ownership Structure, 2001-2011
25%
AUM CAGR (%)
20%
15%
10%
25th
5%
Median
0%
75th
Independent
Full discretion over
investments, distribution
and all business
management functions
Independent
Semi-Integrated
Subsidiary
Subsidiary
Full discretion over investments and distribution
Broad latitude in
running business, with
parent acting as
financial holding
company
Other functions
generally housed at
parent level
Utility
Some discretion over
investments, but
business decisions,
operations and support
functions managed
by parent
Note: Sample includes 126 U.S. and non-U.S. asset managers with more than $5 billion of AUM. Excludes asset growth from
M&A. Sources: Pensions & Investments, eVestment, Casey Quirk by Deloitte analysis
The Complete Firm 2013
Most of the world’s professional asset management firms
lack many of the success factors described in the earlier
section, and a large number lack any. Going forward, many
asset managers — including a number of today’s marketshare leaders — will become irrelevant competitors for 21st
Complete Firms will
successfully execute five
strategic initiatives to
survive and thrive in a
more competitive
environment.
century investors, perhaps benefiting from episodic
outperformance, but generally relying on shrinking revenues
from a decaying book of legacy business.
Firms that act thoughtfully and quickly, however, can transform themselves into highly
competitive Complete Firms, which we define as firms with balanced excellence in investments,
distribution, and business management. Complete Firms will successfully execute five strategic
initiatives to survive and thrive in a more competitive environment.
The Complete Firm 2013: Competing for the 21st Century Investor
20
Exhibit 19
Strategic Initiatives to Create the Complete Firm
1
Investments leadership
A brand built on a clear investment philosophy supported by well-articulated
process, macroeconomic worldview, and innovative thought leadership
Well-led and organized
sales and marketing
Properly resourced, organized and led sales and marketing that aligns
capabilities effectively with market demand
Technically skilled
client interface
Client-facing officers proficient with portfolios, investments, and asset
allocation to support persistent, multiproduct relationships
Ability to compete
for talent
Well-designed incentive programs that attract, retain, and motivate talent
Clear governance and
ownership
Relative autonomy for investment operations, balanced with a clear growth
strategy and a plan for multi-generational succession planning
2
3
4
5
Initiative 1: Deliver investments leadership in a “difficult to differentiate” environment.
As professional buyers become more influential, they will use outcomes and absolute
performance, rather than return relative to benchmarks, to evaluate asset management firms.
Additionally, volatile capital markets will render past performance even less relevant in
manager selection. Investors and their intermediaries will favor investment firms that can
support their performance records with four elements of “investments leadership”:
•
Credible, market-leading investment capabilities, highly differentiated from those
offered by rivals and supported by a compelling philosophy, evidence of the ability to
perform, and strong teams. Firms meeting best practices standards in this area will
rigorously test and continuously validate their value
proposition in the market to ensure they meet
market-leading status versus their competitors.
•
A strong investments quality brand, which
emphasizes that success is repeatable and
sustainable. Best practices for building such
a brand include regularly benchmarking
investment processes to ensure they still resonate
Investors and their
intermediaries will favor
investment firms that
can support their
performance records with
four elements of
“investments leadership”
with professional buyers, as well as creating
positioning and marketing strategies that are market-tested.
The Complete Firm 2013: Competing for the 21st Century Investor
21
•
Innovative thought leadership, capably delivered to institutional investors and
intermediaries for individuals. Professional buyers will favor asset managers that provide
intellectual capital supporting portfolio strategy and development, rather than simply
products. Firms focused on best practices build internal thought leadership creation and
delivery processes that support a steady, regular output of ideas and help for investors.
•
Capacity management and rationing that ensures performance objectives are met and
favors strategic client relationships. Too many active managers today do not fully
understand their capacity limitations and have not developed a clear approach to
addressing the issue. Best practices firms will develop clear strategies regarding capacity,
including a thoughtful analysis of limits, clear messages to clients and prospects regarding
their approach, and asset-gathering strategies that support sustainable firm-level
profitability.
Exhibit 20
Complete Firm Checklist #1: Investments Leadership
Investments Leadership
❏ Credible, market-leading investment capabilities
❏ Ability to articulate competitive advantage
in investments
❏ Innovative thought leadership
❏ Capacity rationing
Initiative 2: Organize well-led and resourced sales/marketing efforts that foster growth.
Increasingly, there will be fewer new flows for which an overcrowded asset management
industry can compete. Consequently, successful asset-gathering — driven by quality sales and
marketing — must focus efforts on the best revenue opportunities going forward, rather than
cover legacy clients and product sets that no longer represent growth. Sales and marketing
organizations of successful asset managers will have the following elements:
•
A thoughtful, market-driven distribution strategy that rigorously identifies and
prioritizes target client segments and distribution channels, focusing resources and
efforts where opportunities are greater and the firm enjoys a competitive advantage.
Best practices include developing a multi-year new business growth plan that properly
identifies and sequences the pursuit of key revenue opportunities worldwide.
Furthermore, successful firms will take extra measures to fully understand client priorities
and adapt their engagement models to deepen relationships.
The Complete Firm 2013: Competing for the 21st Century Investor
22
•
Strong, experienced, empowered sales
leadership. Winning asset management firms
Successful asset-gathering
will seek and retain aggressive distribution
— driven by quality sales
leaders that prioritize growth. These leaders will
and marketing — must
implement clear positioning strategies based on
well-researched views regarding future market
opportunities. Successful sales leaders will
focus efforts on the best
revenue opportunities
actively drive product and service innovation, and
going forward, rather
build strong sales and relationship functions. Best
than cover legacy clients
practices firms will empower and appropriately
and product sets that no
incentivize their sales leadership teams. Experienced
longer represent growth.
leaders will prioritize opportunities and objectives
to match long-term strategic goals.
•
A distribution organization appropriate in size and quality to the firm’s growth
ambitions, and structured to best support the firm’s competitive advantages. Many
of today’s firms maintain sales organizations that either lack the appropriate size to
effectively compete, deploy their resources without appropriate regard to the best
future opportunities, or both. Best practices asset management firms thoughtfully tier
their clients and prospects, model their sales and servicing coverage ratios, and build their
organizations accordingly.
•
Demand-driven product development that balances input from a firm’s investment
and distribution organizations. Asset management firms no longer have the luxury,
in time or cost, of developing products no one will buy. Best practices will include
developing rigorous product-lifecycle management, including unflinching product
rationalization processes.
Exhibit 21
Complete Firm Checklist #2: Well-Led and Organized Sales and Marketing
Well-Led and Organized Sales and Marketing
❏ Market-driven global distribution strategy
❏ Strong, experienced, empowered sales leadership
❏ Distribution organization of appropriate size
and quality
❏ Demand-driven product development
The Complete Firm 2013: Competing for the 21st Century Investor
23
Initiative 3: Build a technically skilled client interface for client cultivation and
retention. Competitive client service, historically a critical differentiator among asset
management firms, will be essential going forward. In the new operating environment,
however, firms with an ability to bring investment and technical expertise closer to the client
will enjoy an outsized advantage over their peers who do not. Firms with client-facing officers
that can engage proactively with clients regarding their entire portfolio will have a significant
competitive advantage in retaining clients for the long term, as well as growing firm
relationships. Successful asset management businesses will support technically proficient
client interfaces with the following elements:
•
A clearly articulated client relations strategy
designed to add value, not simply serve
administrative requirements. Complete Firms
view client service as an ongoing relationship
development function, imparting technical
content and intellectual capital, often based on a
total-portfolio perspective, from their investment
professionals to the client. This additional advice
The new operating
environment, however,
firms with an ability to
bring investment and
technical expertise
closer to the client will
enjoy an outsized
advantage.
can create a form of “distribution alpha” that
strengthens the overall relationship by finding
additional ways to improve outcomes. It also brands the firm as one of a limited number
of trusted advisors to which investors gravitate amid more challenging capital markets.
Best practices firms will develop a strategy that clearly articulates the value added to the client
from client relations.
•
Well-defined client relations roles that clearly outline the responsibilities and
required expertise for client-facing officers, articulating their added value to the client.
As client-facing organizations become a central differentiator for leading firms, roles will
increasingly require technical skill sets that typically have not resided at scale within this
part of the organization. Best practices firms will develop clear and detailed role profiles
with optimal desired professional skill sets, as well as networks within the best pools of such
talent, to execute successfully on building their team.
•
Appropriate technical and relationship talent balance. Many of today’s firms
find themselves out-of-balance in their client relations function, often long on
relationship/administrative skills and short on technical expertise. Best practices
firms will center on ensuring an appropriate mix of investment specialists among client
relations teams and will build clear client engagement processes that optimize the use
of relationship managers and investment specialists.
The Complete Firm 2013: Competing for the 21st Century Investor
24
Exhibit 22
Complete Firm Checklist #3: Technically Skilled Client Interface
Technically Skilled Client Interface
❏ Clearly articulated client relations strategy
designed to add value
❏ Well-defined client service roles
❏ Proper servicing models balancing technical and
relationship talent
Initiative 4: Implement incentives that aggressively attract and retain talent. As
demonstrated in the previous section, the structure, duration, and currency of incentive
compensation is highly correlated to success in
investment management. Extending competitive
incentives across multiple functions and seniority
levels within an asset management firm reduces
personnel turnover and prioritizes value-creating
behavior, which attracts professional buyers and
raises revenues. Competitive incentive compensation
schemes vary widely, but tend to share these
The duration and
currency of incentive
compensation is highly
correlated to success in
investment
management.
common denominators:
•
Performance metrics talent can directly influence.
This is a standard characteristic among any firm successfully motivating human capital;
people work best when they strive to achieve goals directly related to their job and clearly
align with the firm’s stated objectives. Best practices involve regularly benchmarking
compensation schemes to ensure that they are not only competitive, but also link to
proper metrics at the individual, team, and firm levels.
•
Alignment with asset management P&L and strategy. Asset management markedly
differs from banking, insurance or capital markets. Financial conglomerates that provide
the bulk of incentive compensation in shares of their overall enterprise — rather than a
stake in the usually more valuable, in terms of multiples, asset management operation —
tend to lose key people. Additionally, incentives are powerful tools with which to shape
strategic direction. Best practices firms develop incentives linked tightly with asset
management’s results and long-term strategic goals.
The Complete Firm 2013: Competing for the 21st Century Investor
25
•
A clear path to employee participation in franchise value. Executives among successful
investment management firms accrue most of their long-term net worth through their
stake in their asset management operation’s franchise value, regardless of whether the
currency is true ownership or an instrument that replicates equity. Best practices firms
employ equity schemes that are meaningful and will use creative currencies (real equity,
phantom equity, option-like, and deferred compensation) as necessary.
•
Long-term incentives. Professional buyers prize tenure among investment, distribution
and business management executives at asset management firms. Many firms today rely
far too heavily on near-term incentives and, as a result, risk the loss of critical
professionals. Best practices firms will employ compensation systems that significantly
weight long-term incentives within their overall scheme to better ensure personnel stability.
Exhibit 23
Complete Firm Checklist #4: Ability to Compete for Talent
Ability to Compete for Talent
❏ Performance metrics talent can directly influence
❏ Aligned with asset management P&L and strategy
❏ Clear path to employee participation in
franchise value
❏ Long-term incentives
Initiative 5: Institute governance and ownership practices that support long-term
dynamism. Asset management is no longer a simple business. Institutionalizing success —
trapping the lightning in the bottle — is difficult, particularly as firms change ownership,
either organically through generational succession, or inorganically through a transaction. In
the long term, thoughtful consideration of ongoing governance and ownership ideals will
separate competitive asset managers from firms that founder during a transfer of
leadership. Well-tested governance and ownership principles among successful investment
manage-ment firms include the following:
•
Strong, empowered, and experienced business leadership. Asset management
operations function best when run as commercial operations, not utilities for broader
The Complete Firm 2013: Competing for the 21st Century Investor
26
financial services offers. Best practices involve
hiring dedicated people with appropriate industry
experience managing and leading a strong
asset management firm and empowering the
leadership to effect serious change and
continuously improve the business.
•
Ability to execute on asset management
industry best practices, not simply those of the
Thoughtful consideration
of on-going governance
and ownership ideals will
separate competitive asset
managers from firms that
founder during a transfer
of leadership.
parent bank or insurer. Professional buyers
rightfully shun subsidiary asset managers where
an ownercan influence or compromise decisions
that may be in the best interest of the asset management operation, particularly given
its fiduciary obligations to clients. A critical best practice for good owners of asset
management firms is understanding the key principles of success in asset management
(which often differ dramatically from an owner’s core business) and then allowing
leadership the ability to execute on those practices.
•
Accountability for value creation. While it is critical for asset management leadership
to be empowered to implement industry best practices, it is similarly critical for owners to
agree to clear goals with leadership and then hold executives accountable for results.
Structuring the economic relationship between shareholders and the asset manager’s
executive leadership is a critical part of this exercise. Best practices asset management
firm owners hire strong executive teams, grant autonomy, set clear financial and growth
goals, and hold leadership accountable to meet those goals.
•
Clarity regarding generational transition. This is the most underrated element of clear
governance and ownership. Few investment management firms find ways to smoothly
transition ownership between generations because they begin too late. The more
desperately founders need liquidity, the greater the chances of agreeing to a poorly
designed transaction that encourages personnel turnover and destroys long-term value.
A well-designed succession plan centered on a funding mechanism — often involving
permanent, patient capital — that helps younger executives buy out older ones separates
Complete Firms from their less competitive rivals. In private partnership situations,
continuously recycling equity or dynamic recapitalization is a time-tested industry
best practice.
The Complete Firm 2013: Competing for the 21st Century Investor
27
Exhibit 24
Complete Firm Checklist #5: Clear Governance and Ownership
Clear Governance and Ownership
❏ Strong, empowered, experienced business
leadership
❏ Executives that promote asset management
best practices
❏ Accountability for value creation
❏ Clarity regarding succession transition
Creating a strategic plan and business model that supports execution of these five initiatives will
separate winners from losers in the asset management industry of the next decade. Complete
Firms likely will comprise a variety of different, innovative business models. A number of existing
asset management businesses in particular, however, will struggle to transform themselves into
successful competitors without strong, proactive leadership armed with a blueprint for reform:
•
Bank-owned asset management firms, which will need to reconcile the perceived
constraints of a bank (such as cultural aversion to autonomy, inability to implement effective
asset management-focused incentives, and heightened regulation) with success requirements
—and higher multiples — of a successful asset management subsidiary. Transformation will
require innovative incentive schemes and a clear decision, shared at multiple levels of
management, about whether the group’s primary function in asset management is
manufacturing, distribution, or both. Some banks will choose to address the success
requirements head-on, and some will exit the business altogether, either via a proactive
exit or through client attrition.
The Complete Firm 2013: Competing for the 21st Century Investor
28
•
Multi-affiliates — firms built through serial acquisition of smaller, often specialist, asset
managers — have unique challenges. The inorganic growth that buoyed many during the
industry’s heyday is gone, thanks to less M&A activity among asset management firms.
Additionally, the markets and products in favor require multi-asset cooperation and central
distribution, functions with which multi-affiliates struggle to reach consensus among their
stakeholders and, therefore, often trail rivals in terms of efficiency. Many multi-affiliates today
lag the growth and financial performance of the industry at large. The majority of those firms
are stuck with muddled operating models that are neither financial holding companies nor
integrated asset managers. Multi-affiliates can become Complete Firms by clarifying their
governance and operating model, as well as conducting a disciplined review of their affiliate
portfolio, to ensure all their capabilities are truly competitive. For some, this will entail
integrating and rationalizing firms, while working to put substantial quality improvements into
place. For others, it will entail creating more autonomous accountable affiliates on the one
hand and exiting other affiliates, on the other.
•
First-generation partnerships benefit from employee ownership and focused governance,
until their founders either seek an exit or are no longer effective for clients. Many of
these partnerships never reach a second generation because the founders fail to begin a
generational transition plan far enough in advance and build no mechanisms to thoughtfully
make the transition. Partnerships that create generational transition plans and introduce
dynamic recapitalization systems to transfer ownership deliberately over time, often via their
annual compensation process, will create real franchise value and have a much higher
chance of enjoying a multi-generational existence.
•
Finally, the most challenged firms may be undifferentiated active managers, who provide
their clients with beta-like returns at alpha-like prices. Even implementing all five strategic
initiatives described in this section will not be enough if an asset manager cannot credibly
provide clients with any of the four value propositions described at the heart of this
white paper. Reform for challenged players must be revolutionary and involve substantial
transfusions of talent and product, likely resulting in significant changes to operating
platforms and business models.
The Complete Firm 2013: Competing for the 21st Century Investor
29
Conclusion
In as soon as five years, league tables of industry leaders
already will look different. Most large firms today, saddled
with the costs of serving slower-growing legacy client
segments and unable to redirect resources toward newer,
better opportunities, will struggle to maintain their
historical growth trajectories. Many will shrink, losing
business to newer entrants that have custom-built their
operating model for this new, less forgiving, environment.
Becoming a Complete Firm
will involve rapid, and deep,
business transformation,
driven by enlightened
business leaders and
supported by a thoughtful,
strategic approach to
change management.
Some of today’s leaders, however, can survive these
changes and improve revenues and earnings substantially, augmenting their existing competitive
advantages with new ones. Becoming a Complete Firm will involve rapid, and deep, business
transformation, driven by enlightened business leaders and supported by a thoughtful, strategic
approach to change management. Each firm will pursue its own definition of boldness, but speed
(not haste) will be a critical differentiator. Complete Firms will set the standard for success in
investment management.
The Complete Firm 2013: Competing for the 21st Century Investor
30
The Complete Firm 2013:
Competing for the
21st Century Investor
CaseyQuirk
by Deloitte.
Kevin P. Quirk, Principal
Yariv Itah, Casey Quirk Global Practice Leader
Daniel Celeghin, Head of Wealth Management Strategy Asia-Pacific
Grace Cicero, Chief of Staff
Jeb B. Doggett, Director
Jonathan L. Doolan, Principal
Jeffrey A. Levi, Principal
Benjamin F. Phillips, Investment Management Lead Strategist - Consulting
Jeffrey B. Stakel, Principal
Justin R. White, Principal
Casey Quirk by Deloitte helps clients develop broad business growth strategies,
improve investment/product appeal and growth prospects, evaluate new
market and product opportunities, and enhance incentive alignment structures.
Our unparalleled industry knowledge and experience, detailed proprietary data,
and global network of relationships make Casey Quirk by Deloitte a leading
advisor to the owners and senior executives of investment management firms
in the world.
To discuss this white paper, please contact:
Kevin P. Quirk
Principal
Darien
[email protected]
US +1 203 899 3033
Jeffrey A. Levi
Principal
Darien
[email protected]
US +1 203 899 3035
Benjamin F. Phillips
Investment Management
Lead Strategist - Consulting
New York
[email protected]
US +1 347 269 1324
Supporting Team: Michael D. Chia, Jacob F. Walker, Dan
Neeman, Sheryle D. Wells
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