Boutique investment firms can add value to the investment landscape
There is a significant debate in the investment industry about whether an adviser should recommend a large scale firm or a boutique investment firm. A large scale firm has significant backing in terms of a track record and experience, while a smaller boutique firm does not necessarily have all the advantages larger firms may have.
A large part of this decision depends on your client and what they hope to achieve when it comes to investments. Some clients want the security of larger firms while others want to have the personal touch that a boutique firm can offer.
Does size really matter?
This was a topic which was prevalent at the 2014 Boutique Investment Manager Conference which was hosted by MET Collective Investments. Kevin Hinton, Head of Investment Distribution for Momentum Distribution Services, pleaded the case for the boutique investment firm.
"Globally, there are a lot of fund managers who are leaving larger firms in order to set up their own firms. Although they don't have the significant backing which they had at the larger firms, their investment knowledge has not changed. Advisers need to find out what their client's investment goals are, and then make the decision on the direction they will steer them in. Boutique firms can definitely offer some benefits," says Hinton.
There are a number of reasons why asset managers are making the migration towards opening their own businesses. Hinton feels that one of the reasons for the migration is that smaller firms probably have a better alignment between what they want to achieve and what clients expect from them.
Taking ownership of actions
Fund managers also increasingly want to own what they do. Hinton points out that you will find that an owner of a boutique firm has significant personal capital invested in the firm. This is significant motivation for the firm to perform well.
"Research shows that, globally, between 10 and 20 funds are grabbing more consumer wallets. This is a trend which is proliferating into the South African market. What we find is that 52% of fund managers are leaving larger firms because of the client service they can offer as a smaller player. Their ability to focus on one strategy is also an important consideration and contributes 61% towards the decision to leave a larger firm. But perhaps the biggest contributor is the fact that they no longer have to be benchmark agnostic where they have to follow a passive investment strategy. They can switch between active and passive where necessary," says Hinton.
This points to the fact that they want to have the ability to move between passive and active investment strategies without worrying whether clients want short-term gains over long-term stability.
While it may be a significant task for an adviser to motivate trust in a boutique firm to a client, Hinton points out that an important point to remember is that investment firms cannot be everything to everyone, something boutique firms know all too well.
Looking with a critical eye
There is significant pressure on advisers who know all too well that if the boutique firm they recommend does not produce the returns clients are looking for, larger companies will welcome them with open arms.
There are a number of questions advisers can ask when making this important decision. David O'Leary, Director of Fund Research Management at Morningstar South Africa points out that this decision hinges on some important pillars.
"The first pillar which needs to be looked at is the fund managers. There needs to be a right mix between quality and expertise and the company needs to be the right fit for your client's objectives. Remuneration is important; a typical fund manager receives a base salary, as well as a performance related bonus. But one should look at how the performance related bonus is structured. If the bonus is based on short-term gains, fund managers will tend to take a very aggressive approach. If the bonus is structured on long-term gains, they will make a balanced decision which has a good chance of correlating with your client's goals. However, if a bonus is structured on the sale of the fund, significant warning lights should be sounded as the fund manager's sole aim is to sell the fund and they may not have the client's goals at heart," says O'Leary.
The process that a fund manager uses to select stock is another pillar which needs to be taken into consideration. It is up to the fund manager to explain to you in a clear and precise way the method that they use when selecting a stock? O'Leary points out that if they cannot do this, the adviser should move away.
Parent stewardship is also an important consideration which once again raises the concern over selling the fund vs meeting client's needs. The final pillar which needs to be looked at is fees. "If a fund manager has a performance fee attached to the fund, one must be very sceptical. Why must they be incentivised to do their job? Do you pay a surgeon a fee once they have performed a successful surgery?" asks O'Leary.
A world where rules do not apply
What was clear from all of the talks during the day is that the world has changed and the rules which governed the old world of investment strategies do not necessarily apply anymore. A fund manager will be successful if they are able to be flexible enough to bend the rules in order to adapt to their client's needs.
The main point that Hinton and O'Leary drove home was that the intelligence and the knowledge of the market never leaves an asset manager. The fact that they are not backed by significant resources should not necessarily deter an adviser to select a boutique management firm and passionately motivate the selection of this management firm to a client.
Editor's Thoughts:
I suppose the key question to ask as an adviser is, "Would I invest my own retirement income with this company?" Clients are becoming more educated on the world of investments and they are looking for their advisers to be open and honest when it comes to their investments. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
