In 1994, Jeff Bezos founded Amazon.com, which from humble beginnings created the "Amazon effect" that would redefine customer experiences and distribution. Twenty-five years after its creation, Amazon proved it could modernize distribution in any industry with a relentless focus on giving consumers the edge. Amazon changed the rules, and not every retailer was prepared to play the new game.
The same is true in asset management today. Many larger entities are more focused on scaling their operations than innovating to align with their end customers. Well-capitalized, small- to midsize firms appear to have a distinct advantage with more flexible business models, which can give rise to new brands that create modern distribution models with better customer alignment and flexibility.
Just as Amazon's customer-focused tactics changed buyers' expectations, asset managers can rebuild the confidence of asset allocators with better alignment by giving asset owners an asymmetric advantage.
Flexible, risk-based performance fees that mathematically alter the probability of winning can be a new hope for the industry as part of realigning with investors. Fee structures and their related asset classes should reflect the proper market rate for beta and offer fee symmetry relative to the potential for the assets to give investors a statistical advantage. Effectively, asset owners avoid overpaying for below median or slightly above average performance that compounds over the long term.