it may appear intimidating, but big companies also have some disadvantages compared with entrepreneurs. Entrepreneurial companies are nimble and tend to uti- lize resources more efficiently, allowing them to adapt and innovate quickly to changes in the marketplace. In order to succeed, emerging managers must understand key aspects of the business. Because the trend is moving toward a lower cost structure, this means understanding all of the fees, hidden and otherwise. Investors and members within the industry are familiar with management fees, advisory fees, basic brokerage commissions, and sales loads. These are all visible to the investor prior to completing a transaction. Brokerage commissions, management fees, and advisory fees have all dropped considerably. Sales commissions (load funds) are for the most part, disappearing. But the investment industry has many costs internal to operations that the investor never sees. Most investment managers probably don’t understand them all, either. They are a cost to the manager, investor, or both and provide a drag on performance. Some of them are very complex and include (among others) custody, trading (bid–ask spread), fund accounting, fund admin- istration, legal, investments trusts, platform fees, external auditors, currency swaps, transfer agent fees, regulatory, or marketing costs. In some cases, the bid–ask spread for a trade or currency swap for a simple transaction can usurp the management fees charged for an entire year! Yet, most of the attention in the industry is placed on the management and advisory fees.
As technologies improve, managers will be able to provide money management services directly to con- sumers at lower rates. Because of internal cost efficien- cies, managers will also be able to capture a wider margin. Separately managed accounts (SMAs), unified managed accounts (UMA), and commingled funds are all approaches that help managers lower fees and raise their margin. It is likely to become more popular in the years ahead as managers learn how to better meet the demanding needs of their clientele with innovation solutions. Emerging managers have great potential in the financial services industry, but extraordinary difficulties lie ahead. The easy days have long since ended. Fierce competition and a hostile, predatory environment have combined to make life very challenging. Opportuni- ties still exist for entrepreneurial managers who dif- ferentiate themselves and craft innovation solutions for their clients’ needs. But managers who pursue traditional methods in running their business will likely fall prey to brutal market forces that are shrinking margins and raising barriers to entry. They may commence opera- tions with high hopes and enthusiasm, but without a unique strategy, established track, significant AUM, and clear path to gathering more capital, their existence will be short-lived. In the end, many will experience a brief, ephemeral life as an emerging manager.
To order reprints of this article, please contact Dewey Palmieri at dpalmieri@iijournals.com or 212-224-3675.
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