09 September 2018
Importance of the type of business model
Charterholder Superconnectors International (CSI) is a group of CFA charterholders with a common purpose: to create a forum for experienced CFA graduates to exchange ideas and knowledge, and to help peers grow and develop in the asset management industry. Each of us has at least 15 years of experience and we pride ourselves on our CEO mindset (See Terms of Reference). We are a diverse group with members coming from different parts of asset management: fintech, consultancy, wealth management, as well as mid and top tier asset managers. This is an international group, currently mostly focused on continental Europe and the UK.
Members gather formally at least once a month to discuss topics at the top of the mind of any asset management CEO. The added-value for members lies around the sharing of personal experiences. During our most recent meeting in May 2018, we discussed growth strategies. However, the debate quickly rotated around three main topics: business models, ownership structures and fiduciary duty.
The following article reflects some of the high-level points we discussed.
Importance of the type of business model
We started discussing the traditional ways to grow an asset management business, namely: expansion of products, geographies, client types and external growth/acquisitions. However, we quickly started to differentiate asset managers according to their business models. Using the framework published by Accenture(click to download report)and its five different types of business models, we clarified, based on personal experiences, how growth strategies end up being implemented in reality. For example, it is very simple to understand how an “enterprise value creator” could potentially have more scope to grow (especially in AuM terms) given the very large product set. Furthermore, the balance of power could lean towards “distribution”, generally incentivised on net new assets or new revenues.
Ownership structure: Can the AM industry serve two masters?
Writing in 2009 when the global financial sector was on its knees, Jack Bogle reflected that “a man cannot serve two masters.” He was lamenting the chasm that had grown between management and ownership in the financial services sector, creating a fundamental conflict of interest that had played a meaningful part in the crisis.
Ten years on, and despite growing awareness of corporate social responsibility, the central tension between fiduciary duty and ownership structure has not gone away in the asset management industry.
For listed asset managers, the two-masters problem is quite obvious. Due to the obligations to shareholders to provide a return on their investment, this ownership structure can have a bearing on the practice of fiduciary duty to the client.
However, in the group’s experience, privately-owned asset managers face the same dilemma and therefore the debate should not be confined to listed asset managers.
The debate then spiraled very quickly to the question of the tension between growth and fiduciary duty.
Tension between growth and fiduciary duty
The question we debated was more about how bigger firms and bigger funds can be aligned with clients’ interests. There are two extremes here: the David Swensen’s view of the world that argues that size and performance are not compatible and the view that bigger size means scale and lower costs for clients. This was a question we didn’t intend to solve but rather a lively exchange of opinion on practices helped us to understand the real drivers and motivations of any growth strategies: that is, the importance of the corporate culture as well as the balance between formal power (people with explicit power) and informal power in asset management organisations.
In our next meeting we will be discussing the use of third party marketers as a tool for growing an asset management firm.
John C. Bogle is founder and former chief executive of The Vanguard Group:https://www.vanguard.com/bogle_site/sp20090401.html
Pioneering portfolio management, David Swensen