‘Toxic assets’ are just one obstacle that can hold back profitable globalisation by investment firms. Catherine Doherty, of management consultant Investit, looks at how asset managers can overcome barriers to international expansion and lower their cost:income ratios.
Ten years ago, investment management firms had an average cost:income ratio of 55%, with many firms substantially better than that. Now the average firm is standing at 65%, and globalising firms are finding it hard to keep this ratio under control. Client, product and operational complexity create an ‘everything everywhere’ business model, which becomes expensive – and ultimately impossible – to support. In this article we examine tools and approaches the best firms are using to help them globalise profitably.
When we look ahead at the disruption arising from digital, one key factor is the transformation of the client experience. Investment management firms may not promise to deliver any expected investment outcomes, but they can both promise and ensure the client will have a pleasant and engaging journey with the firm.
Many firms feel the use of platforms to reach and service investors presents an insurmountable hurdle in creating effective investor management. However, there are lessons to draw from the way the airline industry took back the client relationship from travel agents and corporate travel departments through the development of frequent-flyer schemes. It is possible to get investors to engage with you directly for servicing, separately from the route they used for purchasing – and once they have come to you, the customer experience can start its work of retention and of building brand loyalty.
A globalising firm will be coming up against local competition in each market it enters, and those small, tightly focused competitors will be innovating as hard as they can. The globalising firm will want to bring localisation and customisation to each market, but will be hampered by its complex network of legacy systems. Fortunately, at the same time the wave of digital innovation is creating demanding and curious customers, it is also delivering the tools to support them. The latest API (application program interface) layer tools, such as Apigee and Mulesoft, are enabling firms to stitch together their pockets of data to create painless onboarding processes, speedy and accurate reporting and insightful investor servicing.
But companies’ budgets are not bottomless, so to fund some of this innovation we need to remove friction elsewhere in the firm.
RAZOR-SHARP PRODUCT MANAGEMENT
As a firm grows, its range of products will widen. Organic growth in the form of new fund launches, and inorganic growth in the form of purchased investment desks and products, will rapidly increase its complexity and threaten its profitability.
Painful as it seems, there is such a thing as toxic assets under management (AUM) – assets that cost the company more to manage than they are worth. In the drive to globalisation, firms will build up a collection of sub-scale funds, orphan investment strategies and hard-to-service clients. In some cases these are obviously unprofitable in their own right, but it can be harder to identify the AUM leeching a firm’s energy while apparently being a good corporate asset.
Even basic product management can become harder to run as a firm globalises, and as the reasons for having clients, distribution relationships, strategies and fund ranges get lost in the mists of time. Successful global firms have a very active product management function which is fully empowered to detect and repair or remove these historic remains of once-successful initiatives.
Truly excellent global firms also have the ability to detect and remove or repair AUM that has a bad impact outside its obvious area. A classic example here is the use of derivatives or hedging techniques that are hard to sustain from an operational risk viewpoint and that lock expensive support functions in place. Top-class product management brings the product managers, investors and support staff together to work out how the intended client outcome – and a better corporate outcome – can be achieved using different investment tools.
The third pillar of success is the effective use of partnering. Even a large global investment firm will have only a few thousand employees, and their specialist operations and IT teams will be a few hundred people. By partnering, firms can get the benefits of scale and experience from firms who spend all their time and intellectual efforts solving a focused set of operational or IT challenges.
In many cases, these partner firms will not themselves be global, so the global investment firm then needs to have a strong and consistent model for the management and oversight of these relationships. This does not mean that vendor management has to be centred in a single place, but the policy for vendor management and the information about vendor relationships needs to be held centrally.
Having this consistent, clearly defined operating model across the firm is a key enabler to effective global growth. It allows the network of partners to be managed efficiently as the firm continues on its path to profitable globalisation; and it allows the globalising firm to expand efficiently through acquisition. At the early stages of discussion with a possible target, the operating model and its approach to partnering are clearly explained, and built into the business case for the acquisition. Integration becomes far easier and the support partners become a key part of the project rather than an irritating drag on its progress.
FREE UP THE FIRM
Globalisation is not a goal. The goal is happy clients using profitable products. Before continuing, remember the three pillars: profitable customers, smart product management and strong platforms.
Catherine Doherty is chief executive of Investit
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