Active fund managers face an existential crisis. Study after study suggests too few of them beat the benchmarks they track. The flood of money into low-cost index tracking products is evidence that investors are losing faith in their ability to outperform and are increasingly unwilling to pay for that lack of alpha generation. So how will the industry look in a decade’s time?
As the Global Director of Content at the CFA Institute, the body that oversees the coveted Chartered Financial Analyst qualification, Jason Voss has spent the past few years pondering the industry’s fate. I caught up with Voss, who left the group last month to become an independent consultant, by telephone from Sarasota, Florida, earlier this week. Following is a lightly edited transcript of our conversation.
MARK GILBERT: What does active management need to do to stay relevant?
JASON VOSS: In the seven to 10 year period, I think you could see active management come down to 30 percent, roughly a third of total assets under management. Consumers really favor the passive product. It’s not just that active can’t compete from a performance perspective, it also can’t compete because its story is more complex.
When the compact disc was introduced, it commoditized the quality of recordings — but vinyl still lived on to everyone’s surprise, and it lived on in a very boutique kind of way. People still shoot black-and-white film photography, there’s a cachet to silver gelatin prints or whatever. Active is going to occupy this niche, in my opinion. It survives because there are things human beings can do that will always remain out of reach of artificial intelligence and machine learning. Human beings contextualize, see interconnections, create and innovate better. That’s why active will survive, because it is adding value. But not everybody does it well, just like not everybody innovates well. Active will become very boutique, it will look very much like hedge funds do now.
MG: What does the end-game look like for the asset-management industry?
JV: The industry needs to wake up to a very simple realization: End clients, your mom or my dad, don’t understand the products they’re already being directed to. They kind of get passive, so they favor it, but the industry has put most of its brains trust and innovation into product development, and customers just don’t need that. What they need is service innovation.
Advisers universally say “We don’t really know who our clients are.” Private wealth management has typically delivered very primitive asset allocation strategies. Typically they’ll go through your financial statements, your tax returns, they’ll ask what your dreams and aspirations are, and they plug it into their firm’s asset allocation software, and if they were honest about it, you’re probably getting one of maybe five to ten strategies. If you have a hyper-refined understanding, there’s no reason it couldn’t have 300 asset allocation strategies.
There was a Faustian pact offered to asset managers. They could earn additional assets through marketing — which is very easy, but comes with strategic handcuffs — or earn the returns through excellent management. It’s much easier to do the marketing one.
MG: So the industry needs to introduce hyper-customization of asset allocations based on individual customer needs and risk appetite?