Growing concerns about the potentially negative effects of fund manager consolidation, including downward fee pressure and rising technology costs on smaller- and medium-sized fund providers has gotten the Securities and Exchange Commission’s attention; The SEC’s Division of Investment Management now plans a review of the impact of this trend this year that will include an industry-outreach initiative. Institutional investment consultants contacted by IA generally applauded the SEC’s forthcoming initiative.
Speaking at an investment industry conference on the West Coast last week, Dalia Blass, director of the SEC’s Division of Investment Management, said major trends in retirement funding, investment philosophies, technology and capital formation have driven changes in the asset management industry that include asset accumulation, new products, new strategies and new business challenges. Though some of these trends may be lowering service fees for investors, she conceded, a negative consequence may be reduced competition in the market due to a diminution of small and mid-sized advisers that cannot complete with the scale of large advisers.
Blass’s office will this year initiate an outreach program targeted at small and mid-sized fund managers. “Our goal is to hear from these groups about regulatory barriers and to begin thinking about ways we could address them,” Blass said in her speech. The Division of Investment Management will focus its outreach on smaller fund groups. It is also considering the formation of an asset management advisory committee to facilitate “thoughtful discussion among experts with diverse viewpoints,” she said.
“Technology has been key to enabling some of the efficiencies and innovations in recent years…On the other hand, asset managers, like all other financial services companies and many other types of companies, now bear the cost of preparing for cyber risks and the broader demands of systems resiliency,” Blass said. She declined further comment on the planned initiative beyond the remarks in her speech.
Investment Consultants Respond
“Blass’s plans raise some interesting questions. We [Mercer Investment Consulting] want to find managers to add value to our clients, and as we all know size is the enemy of performance. So, we agree with her concerns about the viability of smaller firms,” said Jay Love, a partner and senior consultant at Mercer. He added: “I think manager consolidation is good for clients in many ways, one of which is it creates downward pressure on fees. However, if that is to the detriment of our clients in terms of investment performance, that’s not good.”
“We believe that clients will always be best served by having access to managers of a range of different sizes, types and backgrounds, and that it is important that the industry continues to provide those options,” according to Ian Toner, chief investment officer at Verus. He added that while many larger firms can perform excellently, “good ideas are not confined to the largest organizations.”
The increased scale of large organization can be as much a detriment as an advantage in many cases, Toner continued. “Small- to medium-size firms are able to engage with new ideas and introduce interesting new approaches to solving investment problems. Such firms can also take advantage of sources of alpha that simply could not be captured by larger firms with more assets under management: the required size of opportunity is simply different. It is also the case that diversity in size of firm can provide opportunity for diversity in leadership of those firms.”
Evolving Industry Demands
The demand from asset owners for their asset managers to deliver a higher-quality service experience, and the digitization and management of data that this demand implies, is a near-existential matter for some classes of asset managers, according to sector specialists contacted by IA.
The evolution and maturation of the asset management market is going to revolve around scale at the largest firms, according to Lesley Keefe, executive director and asset management advisory leader at consulting firm EY in a recent interview with IA. “There are now close to a dozen $1trillion-plus U.S. asset management firms at the top of the market. That scale, knowledge and investment technology has led to much of this transformation. They have the revenue to drive innovation to develop resources and scale their AUM to make it payback,” Keefe said, adding: “The challenge is for the firms in the middle—what do they do? And how do they invest in technology and how do they compete? The boutiques deliver a certain experience and investment strategies and are very competitive regarding net asset inflows. At very large firms, their sustainability as asset managers is based on being as much a technology firm as an as an asset management firm. But, again, the question is how will this play out for those middle-tier firms?”