The investment management industry is being buffeted by cross-currents, from increased competition to the globalization of investment opportunities, which are likely to affect every money management firm in the country,
To identify the most important trends and to assess their impact on money management firms, and to prescribe what actions money managers should take to continue to prosper, Pensions & Investments and the consulting firm of Eager & Associates, brought together a panel of investment management consultants for a roundtable discussion.
The participants were:
June Debatin, senior vice president, LCG Associates, Atlanta;
Dave Eager, managing partner, Eager & Associates, Louisville, Ky.;
Tom Healey, partner and head of the pension services group, Goldman, Sachs & Co., New York;
Jim Knupp, principal, Ennis, Knupp & Associates, Chicago;
Ron Peyton, president and chief executive officer, Callan Associates Inc., San Francisco;
Ralph C. Rittenour Jr., president, CTC Consulting Inc., Portland, Ore.; and
Chris Schwartz, senior consultant, asset consulting group, SEI Corp., Chicago.
PENSIONS & INVESTMENTS: The subject is the future of the investment management industry.
What are the major trends you see that will affect the investment management industry in the next decade?
MR. HEALEY: One is globalization, and I mean that in two ways. The globalization of products - that investment portfolios are invested globally so there are new markets to invest in - and globalization in the sense that the pools of money are becoming more global, not only U.S. pension funds but the U.K. and Holland and Japan.
Next is something I describe as fee pressure, especially in institutional money management where some argue there's excess manufacturing capacity. At least anecdotally, we see an increase in requests for performance fees. It's a little hard on the data to prove fee pressure is having much effect yet, but I think the next couple of years will show that.
And then, lastly, a big increase in service expectation - quality in depth of service, both in the institutional market and also in the individual market, the 401(k) and the mutual fund market.
MR. RITTENOUR: Well, I certainly agree with Tom's comments. I think some of the trends we've seen in the '80s and the '90s will continue, those being proliferation of investment products, a liquefaction of businesses into financial assets, and increased sophistication of alternative investment strategies. That will create a need for more specialized types of service providers.
We will see some consolidation in the industry. I think the specialized producers of product will flourish. As the industry reaches maturity from a rapid growth phase, you will see a need by firms to focus themselves either by differentiating themselves by product, by becoming lower-cost producers such as a Vanguard, or by focusing on a market segment like the high-net-worth market.
MR. KNUPP: I certainly echo the point of view that fees will continue to be under pressure.
Along with fees, there will be an increased interest in various forms of efficiency and cost effectiveness. This may include having fewer manager relationships. It may include commission recapture programs - anything that can reduce friction and expense will be of interest.
An area that will continue to be prominent is that of the formation of new defined contribution plans. The cash flow will continue to be very prominent there.
I would suggest probably there will be something in the regulatory environment at some point that will make defined benefit plans not as onerous as they are perceived to be today; otherwise, they will become a dinosaur product. But I know of nothing specific in that particular case.
Another idea of increased importance in the future is the use of indexing as a way to manage a portion of large pools of money. Indexing will continue to proliferate; indexers will continue to proliferate products so that we'll not only have sort of plain-vanilla products in each of the asset classes but factor funds, tilt funds, specialty funds of all kinds that will appeal to different kinds of investors.
The last area I would comment on is a concept that I have a personal interest in. It is one that Charlie Ellis first developed some years ago or referred to - the new paradigm of money management.
There are very large global institutions with multiple products and they certainly have a global perspective for investing and enormous resources that are going to promote themselves as major asset managers to very large and sophisticated clients. The idea is that they will capture a big part of the clients' pool of assets to do this, and they will bring integrated thinking in management between asset classes. They will bring some reduction in fees over what you might get by assembling all of the pieces individually.
And they bring one more factor to the party, which is resources in technology which they have in spades and which many large plan sponsors, institutional investors, won't have access to.
MS. DEBATIN: The money management industry is no different from any other industry. We're in a stage of maturity now. Firms have to begin to find ways to differentiate themselves. Technology without a doubt is going to have a major role. Certainly we're seeing more indexing, quantitative products being developed, specialized products that we couldn't have done just a few years ago.
This new paradigm will require investment management firms to do something that maybe they haven't done so well, and maybe none of us have done so well, and that is to be much better asset allocators. The pressure there is going to be significant.