In 2000, most asset managers ran vertically integrated units: all of the activities in the distribution/investment/administration value chain were performed in-house. Dis-economies of scale surfaced using too many job titles and entitlements, and too many rules and processes.
To start with, 9% of asset managers currently function as virtual managers (bottom right box in the figure).
In contrast, the popularity of the multi-boutique model will grow notably. Ever since, 2005, more and more moderate and large asset managers have adopted the model. The pace has quickened in the most recent wave of M&A in which more recently acquired units are consumed within a multi-boutique structure to retain their distinctiveness.
Presently, some 50% of advantage homes function as integrated manufacturers (top left box)down from 90% at the beginning of the decade. The number will continue to diminish as they mainly create their own variant of in-house boutiques in one of two kinds.
Primarily, 7% of advantage houses have independent boutiques with their own P&L inside a holding company (top right box). Secondly, a further 28% have incorporated stalls, sharing support services as well as revenues with the’mother ship’ (bottom left box). Oftentimes, the integration is accomplished by outsourcing middle and back-office actions to a common service provider.
The popularity of the model rests on the fact that asset management is a people business where dimension creates remoteness, remoteness creates detachment, detachment generates individualism, and individualism undermines alignment. Multi-boutiques intention to offset that by encouraging a mindset change from entitlements to meritocracy, from blame culture to private accountability, from poor management to strong leadership. But this transition hasn’t been easy.
The multi-boutique theory runs with the grain of the craft character of active management, which can be inherently unscalable past a particular threshold where costs rise faster than revenue in percentage terms.
The concept has mostly involved turning product teams into autonomous or semi-autonomous businesses with their own P&L responsibilities, giving investment professionals a significant financial interest in their boutiques inside a matrix structure. They aim to promote high-conviction notions and their delivery at the belief that investment is a craft firm where dimension is the enemy of alpha and orientation.
In addition they plan to cultivate a little company mindset in a large business environment. This involves moving from: entitlements to meritocracy; from rigidity to agility; from blame culture to personal liability; from weak management to strong leadership. Failure to recognise that has created unintended consequences.
To start with, investment professionals have certain traits which enable them to excel in their narrow area of specialisation, but not run the business. Most of them like autonomy, but maybe not the accountability that goes with it. They like titles, but maybe not the land they bring.
Thus, more autonomy has intended excessive individualism; more individualism has meant key human risk; key person risk has intended upward repricing of skills. Likewise, more accountability has meant risk aversion; common supply has meant endless disputes in earnings sharing; separation of distribution and manufacturing has meant no focus for innovation. The version has contradictory forces pulling towards too many centers of gravity.
Consequently, internal politics, fear of failure, heritage problems, inconsistent and unrealistic expectations and corporate hype have sapped the emotional, intellectual and physical vitality of senior executives that spent more time handling occasions than handling the business.
For them, walking a fine line between the supervision role of the centre and the entrepreneurial spirit of these stalls has chucked contradictions which need a high tolerance for ambiguity. The necessary DNA has proved difficult to cultivate when there are so many heritage entitlements that are hard-wired into people’s project contracts.
Nevertheless this doesn’t detract from two important conclusions of our survey. Firstly, there is not anything inherently wrong with the multi-boutique version. Birth pangs are inevitable when new methods of working and thinking are introduced. Secondly, its success requires educated top executives who prevent soundbite leadership, cope with the unintended consequences and thrive on ambiguity. Accordingly, three sets of activities are now being taken. Incentives are targeted at achieving internal and external alignment – pension advisers like that.
Secondly, involving the mother ship and the boutiques, there is a clear division of labor that tries to deliver high general operating leverage. The former places the strategic vision for its group, manages global customer relationships, designs incentive arrangements, leverages brand, manages the talent process, plans series for key functions and, generally, oversees shared services. On their own part, boutiques are responsible for getting the best out of talent, creating scalable approaches, promoting product creation and nurturing personal liability. Talented individuals certainly welcome that.
Thirdly, asset managers are investing increaasing quantities of money in developing the artwork of’leadership without authorization’ one of their top executives in other words, either influencing upwards or outwards or sideways those talented people over whom one cannot exercise the usual advantage of position, status or power.
Like at a jazz band, influencing, improvising and listening are the saving skills. Lead trumpeters can choose the melody, set the tempo, set the key and invite the players. But that is all they can do. The music comes from something which can’t be directed: a relational holism that transcends separateness. Shareholders demand it.
New working models are just as good as the people who operate them. They need exceptional insights into mindset changes required by change direction. The standard of leadership will differentiate winners from losers.