Last October, London-based Henderson Group announced its merger with Denver-based money manager Janus Capital Group. This past March, two big British firms, Standard Life and Aberdeen Asset Management, agreed to join forces.
Several formidable trends are leading this activity in the asset management business. First, the growth of indexing, or passive, and quantitative strategies have been the recipient of massive and consistent inflows. Second, returns for active managers have been disappointing as few managers have been able to beat their benchmark net of fees and taxes. Third, technological disruptions such as robo-advisors, have impacted firms’ access to distribution channels for their products and services. Fourth, record-low interest rates and controversial monetary policies have sparked a roaring stock market where investors just want exposure.
While this conversation is not focused on the merits of active versus passive investing, the trends mentioned above have long-lasting implications for the financial industry and ultimately for investors.
Competition with index funds is ferocious, but clients want more than just performance. Fees are under scrutiny and few understand the value delivered by their advisors. Clients demand more transparency, easier access to their information, and a greater depth to not just what they are invested in, but how and why! Benchmarks are not goals.
We would argue advice has been commoditized, for now, until it matters again.
Recognizable and legacy money managers may disappear, new names will emerge. The technology will surely continue to change and investors may even realize that active managers can offer some value when the next recession comes around.
All this means we must continue to improve and adapt our processes, our thinking, and our attitude about finding the next “great” investor. This requires a healthy balance of honest conversations and qualitative data. A lot of money may go to one manager, but that does not necessarily mean a better manager. Or more specifically, a better investment.
These recent two mergers are relevant for us wealth managers, as we believe in the value of finding good and smart managers that have a differentiated edge to investing and have a history of providing our investors above average risk-adjusted returns. Due diligence of such firms now requires another layer of deep investment and operational research given the industry will most likely evolve and look different over the next twenty years.
Reacting to headlines and short-term trends are great for cocktail parties, but bad for long-term success.
What is not going to change is the value of trust and your relationship with your advisor.