CHICAGO - Client servicing and distribution will be key to the success of money management firms, said participants in a recent roundtable on the future of investment management.
In fact, more money management firms are beginning to establish client servicing departments separate from their sales departments, the participants said.
Money management firms that understand their clients and have good access to them can gain an edge against competitors, said participants at the roundtable, sponsored by Pensions & Investments and Eager & Associates, Louisville, Ky.
Money management firms will be run more like a business, focusing more on the bottom line, than they have in the past, said the participants, all of whom are consultants.
All of that means money managers will have to pay more attention to customer needs, to cutting costs and to building distribution beyond existing avenues, they said.
These changes are coming amid a continuing drop in fees, a reduction in the number of managers used by clients and a desire from institutional investors for international capabilities, they say.
Thomas J. Healey, partner and head of the pension services group at Goldman Sachs & Co., New York, said a major trend for money managers will be in higher service expectations from clients. Clients will seek more quality in depth of service, in both the institutional and individual markets, including defined contribution and mutual funds, he said.
Likewise, David L. Eager, managing partner of Eager & Associates, said client servicing and communications will be a way for managers to distinguish themselves.
Others agreed. Clients are going to demand "much more than just managing money," particularly from larger money managers, said June B. Debatin, senior vice president for LCG Associates Inc., Atlanta. She said that as investment management becomes more of a commodity, the relative importance of providing solutions to clients' needs also will increase.
"There's no replacement for getting to fully understand your client and your client's problems," Ms. Debatin said.
For some firms, that may mean opening their eyes to previously overlooked markets, such as high-net-worth investors, 403(b) plans and 457 plans.
The high-net-worth market continues to be a major focus for growth. "Most studies indicate that (the high-net-worth) marketplace is only about one-third penetrated now by the investment management industry," said Ralph C. Rittenour Jr., president of CTC Consulting Inc., Portland, Ore., which specializes in the high-net-worth market.
"Just look at the number of companies around that have created net worths of $1 million to $5 million out of their middle management and top management executives just through the use of stock options in the last 10 or 15 years," Mr. Rittenour said. "Those people need the same type of institutional consulting services that heretofore the institutional market has needed."
Mr. Healey of Goldman Sachs agreed the high-net-worth market is a growth area and will become more competitive. "I would underscore the sophistication of those clients; they are more knowledgeable and they're demanding lower fees and better service, broader products (and) higher quality," he said.
James Knupp, principal for Ennis, Knupp & Associates, Chicago, said two underserved areas are hospital trusts and the insurance industry.
Ronald Peyton, president and chief executive of Callan Associates Inc., San Francisco, said one product area that probably no one has paid much attention to is charitable remainder trusts. He said a recent Internal Revenue Service ruling allows the trusts to be commingled, which is more cost-effective from a manager's point of view.
"Another area that's not often talked about are the 457 and 403(b) funds that are traditionally run by insurance companies and also include an insurance cost in running those funds," Mr. Peyton said.
While there are some specific legal conditions attached to those plans, they could now be run more like 401(k) plans, which creates a market for managers, he said.
Offering some type of international capability will be important for many firms. Christopher P. Schwartz, senior consultant in the Asset Consulting Group of SEI Corp., in Chicago, said: "I think for the midsized to large firms, it's fairly essential that they have some exposure to international investment capability."
In agreement, Mr. Peyton said: "I don't think I've talked to an up-and-coming investment management firm recently that isn't considering an international product to add to what they do domestically."
But not all felt that would be the right decision. Mr. Knupp said that "sticking to your knitting is one of the qualities that really good firms tend to have. Because (international) alliances have not tended to work and it's so expensive to build the true international capability, I think most firms are better off taking a pass on it and being good at what they do."
But the massive U.S. defined benefit and the still-growing U.S. defined contribution markets will still be the bread and butter of investment management.
"The defined benefit market by no means is dead," Mr. Peyton said. "If you look at it, it's a mature market, maybe."
"Those firms who are already in (defined benefit), that choose to compete in that area, there's plenty of market share to be had," he said.
"In defined contribution, where for various reasons organizations have huge market shares, those market shares are open for grabs for the enterprising, high-quality, service-minded firm that sticks to their knitting, does what they do best and use others to do what they can't do as well," he added.
Not everyone agrees, saying if a manager's not in the defined contribution market now, it might be too late.
Ms. Debatin of LCG said: "I would go as far as to say that if an investment management firm today hasn't either become part of an alliance or developed some kind of commingled product or mutual fund, they may be starting pretty late now."
In addition, the defined contribution market is looking more like the defined benefit market in terms of marketing and client servicing.
Mr. Eager said that in the smaller market he's hearing managers say that in three- or four-year relationships with defined contribution plans, they've never had to make a presentation.
"All of a sudden now we have to make a presentation to a committee just as we do on the DB side," he said.
"It's beginning to smell like a DB plan in terms of the way we're servicing the investment component of that," he said.
Gaining control of distribution will be important to the process, the participants said.
SEI's Mr. Schwartz said at least for larger firms, portfolio managers are going to take more of a back seat to the distribution side as money management is viewed as more of a fungible product or a commodity.
Distribution is "going to become the game," he said.
While distribution is important in the U.S. market, it is vital to building a presence among non-U.S. investors, an area of expected growth.
Ms. Debatin said continental Europe is where the United States was several years ago. "The banks and the insurance companies are managing the money and have had control of the assets."
"So that would suggest to me that at least in continental Europe there's a chance for a good boutique type of firm that has very good performance and is a solid organization to make some inroads," she said.
"We certainly know of a number of firms who are growing quite rapidly with foreign clients, but they are the firms that have the distribution channels already in place and the locations, which is a very expensive proposition," Ms. Debatin said.
Mr. Healey said the biggest growth outside of the United States is in continental Europe and Japan. In addition, the United Kingdom will begin taking on a more ERISA-like environment with the passage of new government regulations this year, he said.
He also would focus on the growth of assets in The Netherlands, followed by Switzerland and Germany. He said France, Italy and Spain are starting to worry about underfunding of pensions, which could lead to an increase in assets.
Mr. Schwartz said Canada is often overlooked as a possible avenue for growth, which is surprising given its proximity to the United States.
But as customers of money managers are changing and widening, ownership in the industry has changed too.
A loss of private ownership in general has led to a renewed focus on profits.
Mr. Eager noted that after the move to hire privately owned money management firms in the 1980s, that trend has reversed, with less than 15 of the largest 100 money managers now mostly owned by employees.
Consequently, firms "finally have put an 'e' in the ROE equation of the profitability of this business," Mr. Eager said.
"There's pressure on expense control," which can very detrimental to the business because manager-owners tend to take a longer-term view of the business, Mr. Eager said.
Conversely, greater corporate ownership means money management firms are going to be run more like a business, and not necessarily be run by investment experts, he said.
"I very much disagree with people who say it takes an investment professional to run an investment firm. That idea is out the window," he said.