Archive for the ‘Asset Management’ Category

Strategic Trends for Global Asset Managers

2013-07-03 16.30.18In the years since the 2008 financial crisis, we have seen major shifts in trends influencing growth in the global asset management industry. Four key changes are significantly affecting strategic thinking in the industry:

  • A continuing movement towards bifurcation of vehicles that provide “alpha” and “beta” exposure to market returns. This isn’t by any means new news, but we feel that this is clearly understood by professional investors, but is not fully understood by most non-professional investors. The impetus to find value for fees paid will accelerate the demand for “beta” products further which will cause a sea-shift in assets. Interest in index funds and ETFs will increase even more than they have in recent years.[more…]
  • Increased volatility in the market coupled with increased difficulty in identifying uncorrelated returns will push many alternative strategies into the limelight. Expertise in global emerging and frontier markets, private equity, quant and derivatives-based strategies are becoming the core way of generating any portfolio’s “alpha”. The game is up for those managers that are trying to sell what is effectively beta as alpha.

  • A global macro context is becoming core to any portfolio strategy, including those that bill themselves as focusing on a very targeted market. Even some of the most basic fundamental domestic equity portfolios are now subject to impacts from global markets. It’s becoming less relevant to specialize in one country, region, asset class, or sector. Asset allocation is becoming a more important overlay, especially in understanding movements in correlation over time and ability to shift strategy as correlations shift. Because of massive US corporate investment in China, for instance, many funds that bill themselves as US equity-centric may actually have huge China exposure and need to be managed as such.

  • It’s becoming much more imperative to be able to clearly communicate a firm’s expertise and points of differentiation. The days of asset managers being abstract or vague about their investment philosophies are quickly coming to an end. Many hedge funds and other specialized firms will gain favor because they provide unique value propositions that are not currently offered in the marketplace. What will be critical for their success, though, is the creation of a strong, recognized brand and clear messaging about their differentiation. Additionally, they will need to develop a highly efficient sales organization that can carry that message to investors. As successful as some investment strategies are, the ability to clearly (and sometimes simply) articulate why these strategies are worth investing in is just as important. This is no small effort and should be a core part of the business strategy.

We feel that there is still significant “life” to the traditional fundamental asset management model, mostly because of the huge asset pools that sit in those strategies today and the inertia built into these. But we think that this will shift very soon and very rapidly as competition accelerates and the industry continues to consolidate and chase limited opportunities. The firms that prepare for these shift will be the ones to thrive.

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Fund Consolidation for Asset Managers

OtterYou hear a lot of fan fair when an asset manager or hedge fund decides to launch a new fund. It’s rare though to hear when a manager has to reduce the number of funds they manage, although it happens much more frequently than you think. There are four main drivers of fund consolidation:

1) Large merger or acquisition creating redundancies in product offering. With a slowdown in merger activity across the financial industry this has become rare, but if you listen to pundits recently, this may change soon.

2) Severe loss in assets under management which can make the maintenance of multiple strategies, supported by multiple teams, impractical.  While headline-grabbing fund blowups get all the attention, often simple termination of a large pension mandate or transitions of sub-advisory relationships will precipitate a change.[more…]

3) More recently, sentiment and correlation in the markets have been making many fund strategies behave and appear similar, with similar long-term performance and risk-return profiles, that may not justify maintaining them over time.

4) Many fund strategies have become irrelevant in the market place due to other low-cost options like ETFs.

Once the commercial realities have sunk in, a manager is faced with the difficult task of evaluating their existing fund offering, determining which funds will be targeted, considering the implications of eliminating the targeted funds, then implementing the consolidation.[more…]

What to Look For

Consolidation of fund offering is not as simple as ranking all the funds and singling out the worst performing ones to get rid of. The approach should be more involved. Key questions to consider are:

– How does that fund fit within the overall strategic direction and investment philosophy of the firm?

How profitable is each specific strategy? From a cost perspective, even a fund with relatively good performance, may be too expensive to maintain.

Is each fund differentiated enough in the marketplace? This question addresses how commercial the fund is and how sustainable that is over the long term.

Can assets be migrated to other strategies that achieve same objectives? As most asset managers grow, there’s a tendency towards ‘strategy creep’, where new funds emerge, new model portfolios and strategies are tested, and overtime the lines between funds blurs.

Will having fewer funds allow you to leverage fixed platform? Once downsizing is considered, there may be an opposite tendency to make radical refocusing and extreme consolidation. Managers have to make sure that what they keep can support the existing fixed platform.

Are there any significant synergies with other funds that may be at risk by eliminating a particular fund? Many specialized funds may be small, expensive, and have high variance, but consider how alpha generated with these funds feed into broader strategies.

Closing Funds

Once the funds are identified, there are a number of steps to unwind the fund entity and transition the assets in those funds, much of which are too technical for this post, but it’s important strategically to identify what options there are for directing the assets in the fund:

1) Liquidate the assets and return proceeds to the investors. Popular with hedge funds, but may not be the best strategy for more traditional funds.

2) Transfer funds to similar strategies, as long as investors approve and there are no fiduciary issues with this transfer. This is the most desirable option because the firm keeps the assets under management and associated fees.

3) Sell or transfer funds to a third party manager who may have better capabilities to manage these strategies. In some cases, the manager can negotiate a sub-advisory or distribution arrangement with the third-party manager that can be mutually beneficial.

Consolidation Strategy

Reducing the size and scope of a fund offering is typically not the most appealing strategy for an asset manager who is accustomed to growing the size and scope of their business, but in many instances it may be the most profitable and strategically imperative move in an increasingly competitive market.

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Should You Cull Your Account Base?

PaintingWe’ve written in the past about how the key to success and sustainability is ensuring that your account base is profitable, and having robust client profitability metrics are critical to achieving that goal. It’s easy to say this, but much harder to implement because the implication of this analysis is something that most managers and salespeople find completely unintuitive: cutting clients off from doing business with you.

Years have been spent developing these relationships and these clients are paying hard dollars for your service, so why is it rational to turn that spigot off because some financial model is telling you that the account isn’t a good one. Instinctively sales managers start challenging the results of the profitability analysis, putting into question the assumptions that were used in cost allocations or other methodologies. Salespeople are usually closer to their clients than they are to the finance guys or consultants that put the analysis together, so they will be reluctant to bring up these issues with clients. Inaction often results.

So comes the question: should your organization force a culling of the account base? The answer is ‘yes’, but it has to be done in a disciplined fashion that ensures three things:

1) Accounts that are growing, but have not reached a level of acceptable profitability, are ring-fenced and provided a chance to prove their potential

2) Accounts that are going through temporary difficulties are given fair consideration and an opportunity to reestablish themselves

3) Open communication: The shut-off process should not be a simple discrete event, rather it’s a communication process over several periods where the salesperson and sales management learn about the client’s position, condition, and intent. They also communicate the firm’s new client strategy and economic realities.

The discovery process to either categorize the account or initiate frank discussion with a trouble account often leads to better understanding of clients over all and increase in business over time. In other cases, it leads to civil, less painful cease of business that may resume at some point in the future. These outcomes are much better than the alternative of bitter former clients who can negatively impact your reputation.

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Preventing Success Bias in Client Priority Lists

2013-03-04 17.35.08An interesting question came in on our discussion of client priority lists asking “Isn’t there an inherent success bias built into any client priority list?”. This is a great question and great observation. There is definitely a built-in bias with these lists because by nature they tend to include accounts that have either the biggest production or the biggest upside relative to the rest of the client base. Also these lists tend to be modified continuously to add accounts that have recent increased focus and to remove accounts that are proving difficult to realize their opportunity. These factors lead to lists that are artificially positive/successful and are also difficult to track their overall success.

I have some guidelines to help address these problems.

1) Set a schedule on when lists can be modified. Ideally lists shouldn’t change very often, maybe once or twice a year. Any more and it would be difficult to allow for any traction of new prioritization and it will make the list difficult to track and evaluate.[more…]

2) Define clear rules around how and why a list is modified. In the most formal form, a committee can be created to evaluate the composition of the list and the details of the service offering. The committee should be comprised of representatives of all client-facing groups and all should have a voice. Make sure that any addition or upgrade in the list is matched with a deletion or downgrade in order to keep consistency in service across the platform, and prevent the list from continuously growing.

3) Measure and track the performance of a list like an investment portfolio in order to track the success of the program overall. The “performance” of the program can be viewed as performance year-to-date, over 1 year, over 2 years, etc. Performance of dropped/downgraded accounts should factor into the overall performance over time. It’s important to realize that what you want to understand is not only the impact of an account being on the list, but also whether all the components of the program are working to promote the programs goals.

4) Although this final point may be overkill, it has proven useful when testing new client prioritization programs. Each time a new priority list is created, it should be labeled and tracked separately. For example, you could have 1H 2012, 2H 2012, 1H 2013, and 2H 2013 as separate lists. Overall this is a good benchmarking exercise to help test assumptions about the list and component parts.

There’s usually a concern that by putting too many rules around client priority lists, the organization loses flexibility in targeting resources to potential opportunities. Managers need to find a balance between that flexibility and a structure that allows visibility into priority list’s effectiveness.

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Implementing a Client Priority List

2013-08-10 15.39.42I received a lot of interesting comments from my post last week on client priority lists. I didn’t think this was a topic that would have such broad interest. Most of the comments were along the lines of “sure, this is what you should do, but how do you actually do it”. I’ll attempt to provide a bit more detail on actual implementation here, driven off of specific comments I received.

“How do you create one list when you have competing purposes and objectives for different accounts?”

It is simplistic to assume that one list with a simple purpose is going to satisfy all needs for client prioritization, especially at larger firms. When creating your list, we recommend implementing a combination of different tiers and a series of qualifiers that designate the kind of accounts they are and what kind of service they require to achieve a specific objective. It’s important for the organization to all be on the same page on who the priority accounts are, but also have an ability to see what specific service model to apply.[more…]

“How do you go about defining, articulating, and communicating differentiated levels of service?”

We recommend putting together a service charter that describes three things: (1) what the differentiated level of service is for each tier and client type, including non-tiered accounts, (2) who is responsible for providing a certain service and what the expectation is on them, and (3) how each point of service is going to be measured and monitored. This charter should be part of the communication of the client priority list when this gets published.

How formal the communication is depends on the size and nature of the organization, but could include emails, laminates, teach-ins, or discussions in team meetings. We recommend having a forum where staff can ask questions to make it crystal clear what is being asked. In our experience people end up with very different interpretations of the asks, so anything that mitigates confusion helps.

“How do you get your resources to follow the new focus?”

People are generally much more comfortable engaging with their usual clients in a usual way. It has to be made clear that the expectation is that behavior needs to change to provide more focus on priority accounts. It has to be made clear that the organization is OK with a deprioritization of non-priority accounts given that there is only a finite amount of capacity available.

What becomes clear very quickly when implementing a client prioritization plan is that some organizations don’t have the right capacity, skills, and relationships in place to execute the plan effectively. These might need to be developed (through training, senior mentorship) or acquired if it becomes clear that they can’t be effectively nurtured in-house. In many cases, it may be most effective to acquire personnel with already established relationships and skills. In the harshest sense, this would call for an upgrade of existing staff.

“How do you ensure compliance and how do you track the success of implementing the list?”

A client priority list isn’t a static document. It should be part of the day-to-day life of the organization. To the extent possible, it should should be systemized and included in the any routine reporting, including:

  • Inclusion of a priority indicator for a given account in any dashboards, reports, and screens used by staff and management.

  • Periodic monitoring of services provided and communications to priority accounts, through a CRM or similar systems.

  • Benchmarking performance and activity of these accounts, against different tiers as well as non-priority accounts.

  • Monitoring of changes in depth of relationship and penetration over time.

In the end, the success of the list will be measured on the absolute increase in performance of these accounts, but also in the relative outperformance of the rest of the client base.

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Developing Effective Client Priority Lists

Photo Aug 28, 4 42 35 PMIt’s often quoted that 80% of revenues originate from 20% or less of clients. To focus on these clients, It’s common practice in most businesses to create lists of top accounts to establish which accounts are most important and designate different service models for these clients. These accounts should get elevated service relative to other accounts, including preferred pricing, priority access to services, coverage by the most experienced team members, and more intense engagement by senior management.

It’s not as simple as creating a simple list of top clients and sending it out to sales and service teams. There are many things that need to happen in order to ensure that there is a meaningful change in behavior regarding these clients and that the client’s themselves understand their status.[more…]

Defining the List

The first step in creating a list of priority clients is to define the purpose of the list. Although this might seem self-evident, many firms find that the less clear the objectives of the list, the bigger and more convoluted it becomes. Is the list’s purpose to identify the largest revenue-generating accounts and insure that service remains high to protect these revenues; or is it to identify largest unrealized wallet opportunities; or is it to identify accounts in later stages of a sales pipeline with high probability of conversion? Probably the most common mistake that we see are lists that intermingle cash-cow accounts and opportunity accounts with little differentiation in service defined.

Service Differentiation

Once the purpose is set, then a model has to be put in place to define a differentiated level of service for priority clients. I can’t stress enough the importance of this step. A lot of managers just assume that an “increased intensity” will be provided to accounts on the list, but the teams in the front lines are often unclear on what’s expected of them. Each client-facing team’s tasks need to be clearly defined, not just for priority accounts but also for non-priority accounts in order to establish the difference. The differences in behavior are what make priority list meaningful.

Examples of service differentiators:

  • More resources/more content

  • Preferential pricing / offers

  • Premium access / higher touch service / bespoke resources

  • Priority level of engagement/ timing of engagement (first call status)

  • Senior relationship management / higher experience coverage

  • Further resources/analysis to better understand the account (Internal)

Client Communication

It’s important that clients are made aware of their priority status to the extent that is practical, and doesn’t jeopardize the relationship or relationships with other clients. Clients are very willing to engage with certain counterparties as strategic partners because they feel the value generated through a deeper relationships can be mutually beneficial. I’ll write more on this in a future post.

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Development of Sales Systems (Capability #4)

The last of the capabilities is the anchor that realizes the value of a clear client strategy: development of an integrated sales system built as a hub-and-spoke ecosystem where all critical elements of client information are brought together in a single Sales Portal. Without the right sales systems in place, the implementation of a client strategy becomes extremely burdensome, labor intensive, sub-optimal, and easy to abandon.

Sales SystemsClient information should include CRM activity tracking, client meeting and call notes, client revenues, transactions, client documents, and any third-party data that can enrich a salesperson’s understanding of the account (for broker-dealers, for example, survey data, market share data, fund performance, and securities holdings data would be invaluable).[more…]

Now, it’s probably not practical to say that every single data system that houses client information can be brought together into a single platform. This would be a herculean task for any IT department with an existing complex array of systems, but by thinking about and reinforcing the idea that any work on sales systems should have the ultimate goal of providing better intelligence to salespeople and sales managers in a consolidated fashion.

Client Management should have significant input in, if not outright business ownership of sales system initiatives. This would guarantee that the systems are created with a client perspective. It would also help in informing the IT team what information exists and what would be important to prioritize. Because of the closeness of the Client Management team with the sales groups, they would be instrumental in designing the systems in order to best incorporate into the sales team’s workflow. A big reason for the failure of many sales system initiatives is because many development teams make the assumption that salespeople will change their daily workflow in order to adopt a new technology. Regardless of how useful the new tools are, if they force salespeople reorganize day or forces them to perform new tasks that don’t immediately provide them with a benefit, they will just not adopt them.

Three keys to successful sales system implementation are:

1) Integrate new technologies into existing workflows and systems so that interaction with new tools is seamless (for example integration of CRM functions into email application and mobile devices)

2) Attempt to bring as much disparate client information as possible into a single portal that requires just a few clicks to get from one type of information to another

3) Provide as much of a feedback loop, as immediate as possible, for any information that salespeople are asked to contribute into the system. They should be able, for instance, to run calendars or reports of activities logged into the system.

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Client-centric Financial Metrics (Capability #3)

The CFO’s office, being responsible for all financial reporting in any firm, are the seemingly logical choice as owners of client-level reporting given their access and understanding of the data, technical expertise in financial reporting, and broad understanding of the overall flows of the firm. Regardless, Client Management should play a key role in the definition and structuring of client-level analysis and reporting, for one key reason: a traditional financial management function often has competing (and sometimes conflicting) mandates regarding how they report financial results. We’ve seen instances where legal entity or divisional reporting take precedence over client-oriented reporting that often creates distortions on how an account is reported so it’s hard to see its true performance and who within the organization is responsible for variances.

Client ReportingTake the example of a global client that does business in multiple geographies and across multiple products. Each regional manager and each product manager, working with their respective finance heads, will vie to earmark as much revenue for their division as possible, creating double-counting of revenues and confusing results for a given client. The Client Management team should be tasked with unraveling these knots to provide a clear, holistic picture of an account.[more…] They should also identify what information needs to be delivered within Sales and Sales Management to ensure the right strategic decisions and focus.

In some cases we’ve seen Client Management take full ownership of client-level financial reporting, while in others we’ve seen a close collaboration between CFO and Client Management. Regardless, the Client Management team should have a strong global mandate and management support to oversee or co-manage this process.

Like any financial analysis and reporting function, client reporting involves establishing target budgets, reporting account revenue periodically, looking at trends, and flagging outliers that should be raised and discussed. Additionally, client-specific KPIs (key performance indicators) that help better understand client behavior and assess the quality of business flowing in should also be identified and tracked. Examples include volume and order size, movements versus peers, pricing changes, and changes in wallet size and market share. Client profitability analysis, which involves applying costs against client revenues, is probably one of the most useful, if not most complex, analysis to implement.

Identifying meaningful client segments and creating statistics around those also helps in identifying trends and uncovering opportunities. A strong Client Management team is usually adept at understanding the marketplace to best categorize the account base in useful groups. In many cases, the obvious segments may not necessarily be the best groups to track. The distinction between hedge funds and traditional asset managers, for example, is becoming blurred so tracking these is becoming less meaningful. Segments based on investment style, investment markets, or even firm “personality” may prove more useful for aligning resources.

By aligning client financial analysis and reporting with a strong Client Management function, a firm will set itself up to better manage their account base from a client-centric perspective and help realize the value of a clear client strategy.

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Service Tracking (Capability #2)

Once a client strategy has been designed and kicked off, the real work of implementation begins. Relationship managers, salespeople, and all other client facing professionals now have to engage clients with a new purpose. But how do managers know whether the team is executing based on the new plan and gauge whether the new program is having a meaningful impact on clients? The Client Management function should be able to track and monitor service activity. In many ways this is perceived as a painful thing to do, with many client professionals feeling as if there is additional scrutiny on their work with “big brother” makings. Many managers also feel that instituting policies and technologies aimed at monitoring their staff’s work will alienate them from their team and create a breach of trust.

FeebackThe key to success of the strategy is for Client Management to frame service tracking as a productivity tool that will help client-facing teams use information to enhance their interactions with clients.[more…] There is a huge distinction between systems that capture client interactions for the purpose of management oversight and systems that capture data which then feeds insights back to salespeople to make their jobs easier and more productive. I would argue that without a feed-back flow of information, salespeople will completely distrust the system and find ways to game it, or be completely resistant to adoption. The most talented individuals with the best client relationships will probably be the first to push back because they know they have leverage over the organization.

Activities that should be tracked include phone calls, meetings, and emails. Important documents, like contracts and pricing sheets, should also be stored in the same location as other client data so that client-facing individuals have a single repository of critical client information (to the degree that’s sensible and minimizes risks of information leakage from the company, of course). Any notes or client color should also be documented and logged into the system. Call reports should be required to be written and logged following any important client meetings or calls. There is always a lot of resistance to institutionalizing this, but what we have found is a lot of this is already being done, mostly through emails, but these are not being captured in a system that allows for information tracking and sharing.

What’s incredible to see is that once the ball gets rolling and salespeople start using the information collected, productivity shoots up and everyone becomes dependent on the data. Managers will benefit from this virtuous pattern by having robust client service tracking that, when reviewed in aggregate on a periodic basis, brings the client strategy to life.

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Developing a Client Strategy (Capability #1)

The success of an effective client management function hinges on well-articulated goals the firm is trying to achieve. The clearer they are, the easier it will be for the entire team to buy into them and to stay focused as the program evolves. The goals also have to be realistic given the resources and skill-sets available. It’s tempting to develop grand notions of outsized success, like in the film ‘300’ where 300 Spartans defeated a massive Persian army, but keep in mind that your staff probably was not trained from birth for the single-minded purpose of defeating an enemy. Salespeople especially have to be fully bought in since they will be the ones who will execute the strategy, manage the client relationships, and collect and share information, which are all central to success.

Goals and StrategiesMany managers express concern that if they do not articulate a broad enough scope, they will leave opportunity on the table, but we advise them that creating smaller, achievable targets can actually create more successes over time and prove a faster route to broader goals.[more…]
Once the goals are in place, then managers need to develop a series of strategies and then action plans to achieve their goals. This is admittedly the most confusing step in the whole process as many managers fall into a pattern of endless debates about the difference between a goal, a strategy and an action plan. For clarity, we define ‘goals’ as those that have at their core some external impact you are looking to influence that will elevate your position, e.g., “Increase client revenue by 10%” or “Increase client satisfaction based on xyz survey”.

‘Strategies’ target internal functions and effort that you intend to transform in order to achieve your goals, e.g., “Increase cross-selling in sales team” or “Allocate resources to higher opportunity accounts”. Defining a strategy is largely driven by a firm’s existing and potential future resources. Managers have to look at their capabilities with a critical eye and ask if they are right to compete and make meaningful headway. If they are not, they should have enough capital to upgrade their platform to match their defined opportunity.

‘Action plans’ sit one level below strategies and have the purpose of identifying the work and linkages that need to happen, and assign accountability to that work.

Many managers make the wrong assumption that assignment of tasks falling out of action plans are foregone conclusions given people’s current job descriptions. This is a dangerous assumption especially with brand new initiatives. Creating a list of top new target accounts, for example, could fall under the head of sales because he knows the market, or it could fall to the head of client management because she has all the opportunity metrics. It’s important to be explicit of ownership of all tasks.

It is also critical to perform strategy checks against goals and strategies to evaluate whether they are still achievable, and in some cases still relevant. Both external and internal factors can shift enough to warrant a revisit of the original plans.

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