Since John Casey, chairman of strategic consulting firm Casey Quirk & Associates LLC, entered the investment management world almost 40 years ago, money management firms have had the wind at their backs. But with the prospect of lower investment returns and dwindling defined benefit assets, Mr. Casey said that money management executives are now staring into a headwind strong enough that it could cripple their businesses.
Firms that can target their vulnerable competitors' client bases, develop innovative products for a "normal return" environment and build a truly global brand will ultimately succeed, said Mr. Casey. But firms that hide their mediocre performance behind strong sales and marketing engines, along with local firms that don't find a way to compete globally, will suffer in the new generation of investment management.
And Mr. Casey has seen numerous firms both succeed and fail over the years. Aside from his current post at Casey Quirk, Mr. Casey has also founded consulting firms such as Rogers, Casey & Associates and Barra Strategic Consulting Group, in addition to his time spent pioneering investment manager research for Paine, Webber, Jackson & Curtis and Callan Associates.
How would you categorize the state of the industry? We are moving into a third generation of money managers. Previous generations (from 1970 to 2000) had momentum carry them through years of success. They enjoyed the formation of the defined benefit market, which allowed them to receive major inflows into separate accounts and mutual funds as well. At the same time, they had strong compounded growth as a result of bullish equity and fixed-income markets. For these firms, rising tides lifted all boats. And now many of these firms are vulnerable, for a number of reasons.
What is one of the main reasons that many firms might be vulnerable? In many cases you could have a parent that doesn't care about the issues their subsidiaries face and these firms are ultimately trapped in a bad environment. Maybe it's an environment where strong distribution has masked average or poor performance. As a result, maybe they haven't taken the steps to address some of these performance issues. This leaves firms on very uncertain terms and reduces their ability to be competitive, especially when we could be heading into a period of more regular returns. Other firms are plagued by operational inefficiencies, poor management and leadership, personnel loss or damaged brands.
How many of these firms would acknowledge they are vulnerable? None. And that's part of their problem.
What other environmental factors have shaped, and will continue to shape, this new generation? Transitioning to a new generation of investment management where growth will be slower, returns could be more normal and there will be more competition. Some of the competition may not even exist at this point. We believe, for example, that a number of financial institutions, such as insurance companies and investment banks, already have the resident know-how to play a significant role in the asset management industry. They have the capability already; they just need to commercialize their skill sets for the money management industry. Or, money managers could acquire these skills and face them outward.
What change in the industry could have the most significant impact on the business of money management? The … way the game is played has changed considerably. You don't have to own manufacturing to be in the business of managing money anymore. Money management firms that are considered distributors — who don't technically have manufacturing in-house — can go out and rent it. They have tremendous distribution capabilities. And it behooves them to find the best managers because their livelihood depends on it and they not going to embarrass their constituencies. Their brand is ultimately dependent on bringing quality firms to their clients.
So intermediaries, in some form, could wind up playing a major role in the next generation? If you are a good manufacturer, distributors now have the knowledge and ability to find you. Intermediaries, in a lot of ways, will set the standard for quality. A lot of average managers that squeezed through the bull markets will suffer ... And these firms aren't going to go away, they will just take a different form. It's the quality firms that will find a way to thrive in this new environment.
Define quality firm. Quality firms are size neutral. A quality firm could be a large firm that strictly distributes someone else's product, or it could be a boutique that focuses strictly on creating alpha. There are two key words here that will define quality firms moving forward: liberation and alignment. Quality always wants to be liberated and in control. Alignment means the interests of all the parties involved — clients, employees — are in order. Or it could also mean they are involved in the right types of partnerships, one that allows them to focus all of their energies strictly on what they do best.
Among the largest money managers, who will thrive in this new environment? The complete firms, as we like to call them. These are firms with truly global operations and firms that have been built around core competencies in both traditional and alternative investments. In terms of globalization, the firms that have decided what it is that they really do well, and are able to go quite local no matter the region, will succeed. Investors outside the U.S. are looking to diversify their portfolios away from their home country bias, while non-U.S. distributors are also looking for quality managers and manufacturing platforms.
What other opportunities will exist for firms in this new generation? Targeting vulnerable competitors will present many opportunities to capture market share, or develop competitive products or targeted marketing campaigns. But firms can also focus on their existing clients as a way to build their businesses. Great client relationships, for one, can often translate into more opportunity. Retaining and growing existing clients is likely to be their best economic opportunity. It doesn't just have to be through existing product offerings either. Firms can strengthen relationships through thought leadership and increase their economic opportunities by offering customized solutions, such as liability studies or consultative skills.
Lastly, firms need to organize their businesses to focus more on the individual retirement market. That market is growing tremendously, both in terms of the emerging and massive retiree market and the overall movement to defined contribution plans. Money managers, if they haven't already, should be focused on providing more outcome-oriented products and improving the overall quality of their defined contribution products.