[A preponderance of mainstream industry discussion has been proclaiming that active asset management is under siege and at great debilitating risk from mounting external threats, such as, automated robos, fee compression, a one-sided passive-vs-active press assaults and migration of money to lower cost investment options. Add to this the negative relative performance perceptions which are starting to calcify and ingrain into our collective unconscious, approaching an almost urban legend or myth status. It seems to us that an all-out military response is needed. Active asset managers need to break ranks with the industry overall and proactively address these challenges and perceptions with a well-thought-out and chiseled strategy as the tip of their spear.
Strategy, a word of military origin, refers to a focused, detailed plan of action specifically designed to achieve a particular goal. It is a purposeful directing or re-configuration of your firm’s resources within a challenging environment. It deliberately moves you towards the most important, effective and leveraged way to accomplish the needs of markets and the vital goals of the organization. Strategy is the means by which objectives are consciously and systematically pursued and obtained over time.
Understanding what strategy is—as a practical and powerful business management process and a specific manner of thinking and acting—the key question becomes how do we apply it to individual asset management firms? How do you shape a strategy that will become the direction, scope and future growth of your organization?
In order to explore this more fully, the Institute for Innovation Development went to financial services marketing expert and Institute member, Dan Sondhelm of Sondhelm Partners—an experienced provider of marketing, public relations and sales strategies for the asset management industry. We will be exploring his thoughts and insights on developing strategy and discuss some of the strategic approaches he has directed with his clients that can drive active asset management firm positioning and help them develop their own distinctive strategic manifestos for their marketplace and future growth.]
Bill Hortz: From your professional experience working with a wide range of asset managers, what do you see as the biggest challenges for the asset management industry to be focused on in 2019?
Dan Sondhelm: I firmly believe that the incorrect prevailing focus by asset managers on assets under management (AUM) has created a soft under belly for the industry that will continue to be painfully exposed this year. A 10-year bull market has created what I’d call “AUM lethargy” among many asset managers. Why go out and chase new assets when market returns are pushing your own AUM up 10 percent-20 percent a year? We saw this attitude take a beating during the mini-meltdown at the end of December 2018, which triggered a flight to safety that drained a lot of assets from many actively managed funds. It was a wake-up call that got many asset managers thinking about the future of the industry and their own viability.
Findings from a recent Casey Quirk study—they’re a division of Deloitte Consulting, which focuses on asset and wealth managers—substantiated my concerns by revealing that only 30 percent of firms benefited from profitable growth between 2014 and 2017 and concluded that, without dramatic changes to revenues, costs, and building new competitive skills, one-quarter of asset managers risk becoming unprofitable within a decade.
In reality, the incorrect AUM focus has created gaping holes in their businesses. What has been revealed is that most asset managers do not have a plan beyond that. They are not adapting their businesses to a rapidly changing environment and are not building their outward engagement with their clients and prospects as deliberately and consistently as they should be. And when the inevitable bear market comes, the inevitable outflows from all but the safest money market and bond funds will leave many active funds in an AUM hole that might be difficult to escape from without a strategic plan.
The bottom-line is that asset managers who want to survive can no longer be complacent. They need to do whatever they can now, in 2019, to develop business strategies to address these challenges and make strategic investments for their future growth and sustainability.
Hortz: In reviewing your most recent writings, website and activities, the predominant word you keep framing everything in is “strategy.” Can you tell us why that seems to be an important mantra for you?