Over the past generation, the way to win in the institutional business was primarily to develop consistent and solid performance in asset class driven products, gain the support of consultants for those products, and build product-driven revenue streams. Stable focused asset managers who had demonstrated expertise in specific products could develop growing profitable businesses. Sales, client relations, and consultant relations professionals concentrated on being very knowledgeable about their firm’s investment expertise while institutions and their consultants determined investment objectives, risk tolerance, and asset allocation primarily within a mean-variance framework.

We are now transitioning to the next generation, a process that has accelerated due to the risks that came to the forefront as a result of the financial crisis. Institutions are now questioning conventional approaches to determining investment objectives and asset allocation, challenging their consultants and asset managers to devise solutions which satisfy the risks that they now see in the marketplace. Specific factor risks are being discussed, such as inflation/deflation and liquidity. Downside risk rather than volatility is commonly considered.

The next generation asset manager must provide robust solutions to institutions’ financial problems in order to be successful. It must assemble investment capabilities in such a way as to address current marketplace concerns in addition to, or instead of, providing asset class specific products. Sales, client relations, consultants relations, and investment personnel must seek to understand an institution’s specific problems and needs, then devise solutions to address them. As has been the case with insurance companies for some time, asset managers must understand how their investment capabilities will fit the specific needs of pension funds and endowments. For those that take the time to study these issues and align the investment capabilities of their organizations with their clients’ needs, the rewards will be well worth the effort.

Other managers approach the marketplace with a menu of defined products which may or may not meet client needs. If there is little or no flexibility around those products, in terms of investment design, packaging, or pricing, there must be a very close match between client needs and product features for a sale to be made and relationship to be built.

The “new normal” will be defined, in part, by greater buying leverage and less selling leverage. In this environment, clients will demand even greater flexibility around investment solutions so that their specific needs are met. Firms that have historically approach the marketplace in this manner will be in the best position to succeed.

The answer is that it needs to be a collaborative process. Investment personnel are in the best position to know their strongest investment capabilities. Marketing and sales personnel are in the best position to understand marketplace trends, what is being demanded by their client base, and the state of the competitive environment. All of these factors must play a part in making important commitments to product development. Often a product development function exists to coordinate all of this. But with or without that function, communciation forums must be created to exchange information across departments so that all critical personnel arrive at the same conclusions with respect to product development and delivery. It is very important to create an open environment where all views are vetted and respected. Investment management requires a team oriented culture, not a rigidly divided one by function.