How Smaller Investment Firms Can Gain an Edge over Larger Competitors

Smaller investment companies have advantages; it’s just a matter of recognizing those and taking action.  

While smaller wealth and asset management firms have concerns about fee compression and market volatility, they can still maintain advantages. 

Sure, larger firms have the resources to scale and withstand the downward pressure on fees, they have their weak spots.

Smaller wealth and asset management companies have what the larger ones don't have: 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 16,000 listed asset management and investment advice companies in the United States. 

5 Ways Smaller Investment Management Firms Can Gain an Edge over Larger Competitors 

1. Investment Firms Must Be Agile and Flexible 

Agility and flexibility are the inherent advantages of being a smaller wealth or asset management firm. From these two qualities, you can derive all other advantages. 

Imagine your firm is a motorized dinghy boat. Unlike a cargo ship, dinghies react to change very quickly when you steer the outboard motor in another direction. 

In contrast, when a captain maneuvers a cargo ship, the boat’s reaction time is very slow. Once the movement finally gets going, it’s difficult to undo the changes.

The larger competitor is that cargo ship. Change is slower, but once change occurs, it's hard to switch course.

If someone has a good idea, the suggestion will be passed up the chain of the command. This will result in bottlenecks and drag out the decision-making process for months, if not years.

Even when the companies know they should upgrade their technology, for example, 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. 

Be The Dinghy

Yes, you have limited resources, but in leading a smaller organization, you can maneuver fast.

Also, overhead and legacy systems will not burden you to the extent it does with bigger RIAs.

If there's a good idea to implement, you have fewer hoops to jump through, fewer board members to seek approval from. Assuming it fits the budget, just do it. 

Also, maintain flexibility and adopt a hybrid work model. The pandemic is not over yet, and employees should be able to work from anywhere and everywhere.

2. Trust In Your Investment Strategy

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."

3. Smaller RIAs Must Leverage Third Parties 

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With limited resources, you can't do everything on your own.  

However, you can still access a high-quality service or skill set you currently lack (or assume you can't afford).

Being a smaller company, not only do you have the flexibility to seek out a third-party service provider, 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.

4. RIAs Must Be Open to Technology

Referring back to agility and flexibility, making changes in technology is one of those areas where larger companies run into trouble. That's because they have 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, like accessing locally stored software by physically showing up to an office or relying on remote desktop connections, is outdated and inefficient.

You need a cloud-based setup. Find solutions that automate, expedite, customize, and improve data and reporting quality. If any of these considerations increase efficiency and help improve the client experience, then you’re on the right track. 

5. Small RIAs Must Deliver Genuine, Personalized Service 

This is an area where a larger competitor has a harder time competing. 

When you’re a smaller wealth or asset manager, you’re less likely to take your 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. 

The Advantages Are There for Smaller Investment Management Firms 

Smaller wealth and asset management companies face their share of challenges, like fee compression and larger competitors, 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. 

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