Temptations of Asset Management
Any business that generates 30-40% profit margins is tempting, especially if it seemingly has few barriers to entry. This has been the record of the asset management business over the past 30 years. While the days of outsized margins across the industry are over, the best managers will still enjoy excellent profitability. However, while barriers to entry are not substantial, barriers to success are.
I have often heard that the average restaurant stays in business for three years. Perhaps something similar can be said about the average asset management business. Insurers, banks, and other financial services firms often see asset management as good diversifier and an extension of the use of in house investment resources. But managing money for a parent company is very different from convincing independent institutions that they should entrust their investments with you. Firms generally have to demonstrate performance as an asset manager, not just an investment department, for a period of time before gaining the confidence of potential clients. They need to show separate focus and business management.
Similarly, asset managers who try to extend their brand into new distribution channels, such as retail-oriented firms targeting institutions, face hurdles. Existing investment capabilities are not necessarily directly transferable to the new client base. Many firms attempt to use the same investment engine to serve all types of clients; the results have been mixed. Success often hinges on convincing each client that its specific needs will be served well, despite the fact that the firm is trying to serve the needs of a diverse client base. History indicates that the more diversified an investment firm is with respect to product and client, the greater the profitability challenges are.
Finally, pure start-ups face the greatest challenges. It is often unimportant to potential clients that managers of start-ups have had previous success. It only matters that they are successful in the current endeavor.
So, while asset management can be a profitable and enjoyable business, creating great temptations, barriers to success are significant. It often takes quite a few years before success is achieved. Unfortunately, too many owners and executives responsible for the business lose patience just before they might be seeing the fruits of their labor and investment.
Add comment June 29th, 2009
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