manager. By the time the manager realizes what’s hap- pened, it’s too late. The performance track record and control will have already been released to the acquiring entity, and the manager will have little recourse to reverse the deal. In an attempt to regain focus on port- folio management, the emerging manager may surrender dreams to be an accomplished entrepreneur and revert to life as a paid employee. As Exhibit 6 showed, managers have been under pressure to reduce costs. Moreover, Exhibits 6 and 9 (Panel B) demonstrate that the financial industry has been reducing management fees and squeezing margins. Another factor that further compounds the challenges faced by an emerging manager are the fees charged to access the selling platforms. Without being listed on a selling platform, the manager has no access to a retail investor and has excluded this opportunity to raise assets. Sales platforms come in many ways. Major brand- name agencies, such as Fidelity, Schwab, and TD Ameri- trade, all charge the investment manager the greater of an annual fee (e.g., $20,000) or 40 basis points. Con- sidering that most managers now charge less than 70 bps, the manager will be conceding more than half of all gross revenues, before all other operating expenses. Moreover, some of the platform providers, such as Schwab, promote robo-investing directly to investors at fees lower than the platform fees they charge outside managers! In fact, many platform providers sell their own passive products at a rate lower than the fees they charge external emerging managers. Thus, the manager has the unenviable task of trying to raise assets against a competitor who can significantly undercut rates to the same customer. This leads to an unsustainable approach for managers who need to differentiate their offerings or, better yet, craft innovative solutions for long-term survival. THE HIGH COST OF … HIGH COSTS
biotic partnerships, innovative platform applications, viral marketing, collaborative alliances, and disruptive technologies create new opportunities for growth. In order to succeed, future managers will be required to think and act entrepreneurially. This means finding partners that fit their strategies as well as sales platforms that can be offered for competitive fees and provided conveniently to the consumer. Plenty of oppor- tunities exist to structure deals that are beneficial to both parties, so long as each party provides value-adding ser- vices. A manager brings talent to a deal, but talent alone is no guarantee for success. The investment community is teeming with similar-looking products and investment professionals. Entrepreneurial managers need to separate themselves from the masses. Unique, compelling offerings with strong track records help improve odds of success. Fur- thermore, investment strategies should be rigorously tested (ideally with actual investment dollars under a variety of market conditions) and seeded with a strategic partner. Increasing assets will allow a manager to build out a strong, qualified team. Entrepreneurial managers will prosper following these basic guidelines. But emerging managers who don’t adapt are destined for failure. The current path is evolving quickly and ever changing. Evidence shows that the industry does not favor small, emerging man- agers. Channels of distribution continue to tighten along with declining management fees. The industry is moving toward a polarized existence of haves and have-nots, with few in the middle. There are even fewer at the top. Managers today are not afforded the luxury of second chances. They need to be clear about their core competencies and communications to external parties. They need to be focused on service and keep operating costs low—efficiency and effectiveness rule supreme. Managers should grow organically, where possible, and take care of key members of the team. Finally, they need to maintain the organizational spirit, excitement, and energy. People within the firm need to handle many different job roles, and there is no room for corporate dead weight. Consequently, it is essential that all members of the team think and act entrepreneurially. Entrepreneurial managers will be competing against much larger bureau- cratic companies that have massive staffs, cheaper access to capital, and superior distribution channels. At first,
FUTURE DIRECTIONS
The existing model for emerging managers paints a gloomy picture. High costs, low margins, rising barriers to entry, increased regulation, and competition—all point to a bleak future. But entrepreneurial talent often discovers unexplored channels to success. Strategic, sym-
13
W INTER 2015
T HE J OURNAL OF I NVESTING
JOI-SHULMAN.indd 13
11/5/15 5:03:04 PM
Made with FlippingBook Online newsletter