How Smaller Investment Firms Can Gain an Edge over Larger Competitors

May 27, 2020 - Stephen Van de Wetering

The advantages for smaller companies are there; it’s just a matter of recognizing the advantages and taking action.  

While fee compression and market volatility from COVID-19 are big concerns for smaller investment management firms, that doesn’t mean you, the wealth and asset manager, can’t maintain your own advantages. 

Sure, larger firms have the resources to scale their business, withstand the downward pressure on fees and market volatility, but they lack the advantages inherent in being a smaller wealth or asset management company: 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 

Being Agile and Flexible 

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

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

When a captain maneuvers a cargo ship, the boat’s reaction time is very slow. When the movement finally gets going, it’s very difficult to undo the changes, should you wish to do so.

The larger competitor is that cargo ship. Things tend to be more rigidly structured, and change is slower. If a team member has a good idea, such as implementing a new portfolio accounting system or trade order management platform, that suggestion must be passed up the chain of the command, and more than likely will result in bottlenecks, dragging out the decision-making process for months, if not years.

Even when the companies recognize the good in technological change, for example, it means overhauling an IT infrastructure that has been 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. 

Your firm is indeed the dinghy. You can maneuver fast and are not burdened by overhead and legacy systems on the magnitude that bigger ones are. 

Yes, you have expenses and resources may be limited, but in leading a smaller organization, you are less concerned about formal titles and hierarchy, and more concerned about who will produce and contribute positively to the bottom line. Suggestions to improve the firm should be welcomed and reviewed promptly. 

You understand the importance of “all hands on deck.” If you or your staff has a good idea to implement, there are fewer hoops to jump through, fewer board members to seek approval from. Assuming it fits the budget, you’ll just do it. 

The key is to always keep an eye out for those opportunities and threats, reacting quickly to attain the former and quickly to avoid the latter.

The recent lockdowns have further demonstrated the importance of being flexible and agile.

Moving operations from an office to a home-based environment, carrying out all communication and collaboration remotely, and preparing for disruptions to cash flow came are all a reality in the age of COVID-19. Such change may be unwanted and unexpected, but there is no avoiding it. The challenge must be met head on.

Our recent blog post about how investment firms should react to the coronavirus can help navigate through uncertainty and prepare for new opportunities.

Trusting In One’s 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 are the smaller asset managers performing 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.”

Leveraging Third Parties 

With limited resources, it’s hard and expensive doing everything on your own.  

But even with limited resources, it’s not impossible to access a high-quality service or skill set you currently lack or otherwise couldn’t afford. 

Being a smaller company, it’s not just that you have the flexibility in seeking out a third-party service provider, it’s also a necessity to find such alternatives to maintain a competitive edge. 

Depending on your needs, there are third parties that handle trading, investing, HR, accounting, IT, legal/compliance, and middle- and back-office operations.  

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. 

You can carve out an advantage in a crowded space when you have more time to focus on what it is that you do best, and that is how third parties and outsourcing can help. 

Being Open to Technology 

Referring back to agility and flexibility, making technological changes is one of those areas where larger companies can run into trouble because they have invested so heavily in infrastructure that cannot 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, it is possible to adopt new systems that can be managed by a third party, should time or lack of expertise be a concern. 

Be open-minded and recognize the advantage you have in being able to pivot. 

If COVID-19 has taught one thing, it is to be prepared to work remotely.

The old way of doing things, 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. 

Focusing on Delivering 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. Clients aren’t handed to you. You know how hard it is to acquire clients and stay afloat, and 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 from the pandemic, fee compression and larger competitors, but the small organizations are by no means rendered helpless. 

The advantages can all be derived from the inherent nature of being flexible and agile that is associated with smaller investment companies. 

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 putting you in a better position to serve the clients, something the 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.