WEST CONSHOHOCKEN, Pa. - The wake-up call has sounded: Money managers have to start managing their businesses as well as, if not better than, they manage assets if they're to survive long in the new century.
That's the recommendation of Investment Counseling Inc.'s ninth annual assessment of the money management industry, the Competitive Challenges 1999 report.
According to the West Conshohocken, Pa., investment banking and vendor consulting firm, "Astute industry observers realize that the phenomenal growth of the money management business has been due primarily to external factors rather than to brilliant strategizing on the part of internal management."
In the 1999 report, ICI consultants challenged the notion that the size and breadth of money management firms, as described earlier in the decade by Goldman Sachs & Co. and Charlie Ellis of Greenwich Associates Inc., will be the main factor determining success in the next decade. Rather, ICI suggested, money management firms of any size may gain competitive advantage over the long term by addressing five key challenges.
The key challenges
* Mastering the challenges posed by e-business and technology;
* Providing clients with customized services;
* Creating new partnerships, primarily with brokerage and financial services companies, Web-based portals for investment services, and print, Web-based and broadcast "infomediaries" that provide information to investors;
* Sharing and leveraging knowledge about clients throughout the firm;
* Attracting, retaining and training talented staff in investment management, marketing, client services and product management.
Electronic business may prove to be the most difficult of the challenges for money managers to master. "It is clear that we are at the very beginning of a revolution that the industry as a whole has yet to embrace. Only a few firms have scratched the surface of the potential competitive advantage that lies in understanding and maximizing the benefits of an e-business strategy," the report says. "It appears that much of the competitive advantage in the industry has been temporarily leveled by the technology revolution. . . . The irony is that the ability to exploit the new technology may provide a distinct advantage to smaller or more focused firms."
And part of any e-business strategy for money managers likely will involve adding further customization of client options. ICI noted that in the financial services industry - including 498 companies that manage more than $500 million each in institutional tax-exempt assets, 8,801 long-term equity mutual funds and 5,734 long-term bond funds - even managers that have superior performance will have to do more to solidify their client bases by establishing closer relationships with institutional and retail clients.
Managers will succeed through further segmentation of investor groups - dividing much more narrowly the traditional classes of institutional, retail and high-net-worth individual clients - and providing each tier of investors with a huge number of service and investment options, the report predicts.
The study includes the results of this year's survey of 89 money management firms, which total more than $3.6 trillion in assets under management. While all managers surveyed agreed investment performance was the key determinant of success, 98.2% listed client service and customer satisfaction a close second. Competitive compensation for employees was third, with 91.2% of respondents ranking it a highly or moderately important determinant of firm success; followed by investment product capability, 89.5%; and employee satisfaction, 84.2%. Investment product pricing came last, with only 49.1% of managers surveyed ranking it as an important success factor.
Money managers have a lot to lose on the institutional side if they slip up in any of the five areas. With more than $8 trillion under management, the institutional segment has by far the largest portion of assets under management. The defined benefit portion of this segment is mature and stable, compared with the defined contribution plan segment which currently accounts for 28% of all institutional assets, and which is projected to grow 13% annually, according to the report.
The 10 largest money management firms control 35% of the total institutional asset pool, the study indicated. The top 10 to 20 management firms have a 12% share of the institutional asset market; the top 20 to 30 managers have 8%; the top 30 to 40 firms, 6%; top 40 to 50 managers, 5%; and the rest of more than 2,000 firms holds 34% of institutional assets, the study indicated.
Money managers surveyed are still winning 45.6% of their new institutional business through direct sales, although pension consultants remain an important distribution channel, accounting for 34% of all new business. Broker consultants contributed 8% of new institutional business and other intermediaries, 2.6%. Other sales channels accounted for 9.8% of new institutional sales, the survey said.
Net new assets under management slowed in mid-1998 because the market cooled, ICI said in its report, although growth for net new institutional assets was 15.1%, a little better than in 1997, when growth was a net 11.7%. Net new growth of private client assets dropped to 8.5% in 1998 from 12.2% in 1997, and net new growth of retail assets dropped to 11.4% in 1998 from 19.1% in 1997.
This mixed rate of new asset growth resulted in a wide variance in manager profit margins, the report noted, with the 1998 average at 24.3%. Institutional and retail management firms remained the most profitable segments, with an average profit margin of 35%.