Small investment companies have advantages; it’s just a matter of recognizing those advantages and making the most of the position they're in.
While smaller wealth and asset management firms have concerns about rising costs and market volatility, they still have a lot in their favor.
Yes, larger firms have the resources to scale and withstand the downward pressure on fees, they have their weak spots.
Smaller investment management firms have what the larger ones don't: agility and flexibility.
Consider the ways smaller investment firms can gain an edge over larger competitors, if not to protect your market share from the Vanguard’s and BlackRock’s of this world, but to distinguish yourself among among the 14,800 registered investment advisors in the United States.
Imagine your firm is a dinghy boat. Unlike a cargo ship, dinghies react quickly to change when steering the outboard motor in another direction.
In contrast, when maneuvering a cargo ship, the reaction time is very slow. Once the movement finally occurs, it’s hard to undo the changes.
The cargo ship is that larger competitor.
If there is a good idea, it will be passed up the chain of command, resulting in bottlenecks that drag out the decision-making process for months, if not years.
For example, many RIAs know their technology and processes need to be updated, but it means overhauling an IT infrastructure laid out years ago, quite painstakingly. Changing out of those systems results in further disruption that larger organizations aren’t willing or able to do.
Event with limited resources, you can maneuver fast when leading a small investment firm.
Similarly, you can avoid the massive overhead and legacy infrastructure burdens that
When smaller organizations find a good idea to implement, they have fewer hoops to jump through, fewer board members to seek approval from. Assuming the move fits the budget, the decision happens.
According to a study from Affiliated Managers Group (AMG), independent boutique asset managers have "significantly outperformed" non-boutiques in periods of heightened volatility.
The study, based on 20 years of data (1999-2019), showed that the average boutique outperformed the average non-boutique in 10 out of 11 equity product categories by an average of 116 basis points in periods of elevated volatility and 41 basis points in all other periods.
So, why do the smaller asset managers perform better?
Jason Hollands, Managing Directory at BestInvest, has an interesting take:
"Talented managers can of course be found in asset management firms of all sizes, but large groups invariably have very wide product sets and are unlikely to be consistently ahead of peers across all areas.
In contrast, most boutiques focus on a narrower range of assets classes where their expertise really do stand-out from the crowd and they have to sink or swim first and foremost based on their investment success rather than distribution muscle.
Culture is a really important part of the mix and one of the attractive aspects of most boutiques is that fund managers have much greater ownership over their investment processes and are not dragooned into following a single philosophy or house view that they may not have conviction in."
Kevin Horgen, the CEO of AMG, also weighed in:
“With their unique entrepreneurial cultures; highly focused, specialized investment processes; and direct ownership of their businesses, independent boutique firms are most closely aligned with clients’ interests and able to protect capital and nimbly pivot to the investment areas of greatest opportunity in general – and especially in times like these."
With limited resources, you can't do everything on your own.
Smaller and medium-sized investment managers have to use the time wisely, thinking about revenue-generating and client-centered activities.
Leveraging third-party, outsourced solutions are great ways to access high-quality services and skill sets you don't have and/or at a lower cost than doing in-house.
Being a smaller company, not only do you have the flexibility to seek out a third-party service provider and partner with them quickly, it’s also a necessity to find such alternatives to maintain a competitive edge.
Depending on your needs, you can find third parties that handle:
According to a study from Fidelity, 84% of advisors surveyed had a successful experience with outsourcing, and advisors that outsourced reported higher AUMs and higher compensation compared to those that didn’t.
When you have more time to focus on things you do best, you gain an advantage. Ultimately, that's what third parties and outsourcing do for you: free up your time to do what you do best.
Referring back to agility and flexibility, making changes in technology is an area where larger companies run into trouble. That's because they invested so heavily in technology infrastructure that can't be easily changed or uprooted.
You have an advantage in not being “stuck," at least not to the extent of a bigger organization.
And referring again to third parties, they can help you adopt and migrate to new systems, should time or lack of expertise be a concern.
The old way of doing things, be it manual and repetitive work or operating out of Excel spreadsheets, is outdated and inefficient.
Find solutions that automate, expedite, customize, and improve data and reporting quality.
Similarly, consider the use of AI in investment management. Wealth and asset managers can use machine learning tools to help manage portfolios and identify potential investments. AI-powered machines can sift through large sums of data to identify hidden patterns and make predictions that are used to identify investment opportunities.
This is an area where a larger competitor has a harder time competing.
As a smaller wealth or asset manager, you’re less likely to take the client base for granted.
Nobody hands clients to you. You know how hard it is to acquire clients and stay afloat, so you have extra motivation to keep clients satisfied.
It may be a struggle managing an investment firm, but your advantage is that personal service; you just need to be in situations that allow you to be more client-focused.
One way to spend more time on clients is by outsourcing various functions, which frees up your time.
According to the study from Fidelity cited above, of the 84% of firms that had a successful experience with outsourcing, 53% of those firms mentioned allowing the firm to “focus on deepening client relationships” was a reason for the success.
Small wealth and asset management companies face their share of challenges,, but the small organizations are by no means rendered helpless.
Agility and flexibility are everything, and from that comes all other advantages.
When acknowledging and embracing your flexibility and agility, you realize the agency you have in bettering your firm’s position relative to larger competitors.
You can adjust investment strategies as needed, without being stuck to a rigid philosophy that defines a larger organization.
You can quickly reach out to third parties and find technology that better serves your organization, as well as put yourself in a better position to serve the clients. Personalized service is something larger, more impersonal organizations can’t do so well.
The advantages for smaller companies are there; it’s just a matter of recognizing the advantages and taking action.