Look after your Client or he will look after you…

Some years ago I wrote an essay to illustrate the long term impact that fees have on the investment results of a family. In the same piece I also discussed how the lack of risk taking by professional money managers diminishes the chances of achieving long term capital appreciation on savings.

In recent weeks, the same kind of curiosity encouraged me to think about those ideas and numbers from the point of view of an executive running a wealth management business. By all means from his perspective it is not a nice picture; those fees are much needed, be it because of low interest rates, complex markets, fee pressure and continuous outflows of assets under management, regulatory complexity, mounting costs and low success in attracting fresh capital.

I am fascinated by the recruiting activities of the Investment and wealth management industry, you learn a lot about what they are thinking about when you detect recurring patterns in hiring. Currently two areas are hot; compliance in response to regulatory pressure, matched by demand for asset raisers and sales people. Some institutions call this sales personnel portfolio managers, others name them relationship managers, and other call them client advisors, brokers or private bankers.

Their corporate mission is to attract new clients to the organization that they represent and to get paid accordingly. This is no easy task. The normal compensation model is a base salary, expenses and a share of the profits that they generate for their institution.

Since the outbreak of the last financial crisis, many clients suffered losses and lost confidence in the industry. The wave of disappointing headlines on banks and the industry in general that littered the news contributed to a confidence and reputational crisis. Fewer and fewer clients are willing to purchase services that have failed to deliver returns since the late nineties. Accounts are being repatriated from many tax havens and the over stretched middle class is eating into its savings to keep up with lifestyle.

All this makes the odds of raising new money lower, each dollar of new money costs more to collect, and the revenues generated by it are increasingly smaller and more fragile. Facing these challenging circumstances calls for management to develop true strategic vision, it calls for new products rich in purpose, for new values within the organization, for execution boldness and for creativity.

Instead, the moderately self-centred management of many institutions wants to play it safe, the adage is as always do not take career risk, so the decision to beef up the sales force is easily taken and more “hunters” are poached to try and beef up top line growth. The iconic monologue of Matthew McConaughey’s in the wolf of Wall Street points to the underlying culture.

Some firms have started acknowledging that these “hunters” often lack the knowledge, the skills and the economic incentive to produce investment returns for their clients, thus the Investment Advisor or the “farmer” appeared in the Jurassic landscape of wealth mangers. The role of the farmer is to stay at home and look after the portfolios, ensuring compliance to centralised allocation guidelines or to individual mandates and to help in luring in new clients with attractive and knowledgeable ideas. This also frees time for the hunter to roam the prairies in search of new clients and to manage the expectations of existing ones.

This development is most definitely a step in the right direction but in many cases, and by design, farmers lack the authority and the experience to truly exert investment initiative and thus to oppose poor or conflicted decisions.
A study by McKinsey & Company on the North American asset management market shows that marketing and sales costs have risen over 50% over the past five years. At the same time it finds that net inflows as a percentage of total AUM were only 2.4% in 2012, far below the pre-crisis average of 6%. So what should an established business do in order to survive and thrive over the next decades?

The answer is very simple, but not at all easy to implement; businesses should focus on improving the services they are selling, not on the fees it wants or needs to earn on them. A product is not good if it can be sold, it is good if it generates an advantage to who buys it and also to who sells it.

Businesses should re-discover ways to align their goals with the ones of clients, and they should start compensating people for setting and achieving long term goals. The perpetual battle between the sell and the buy side has to end; neither one nor the other can prevail, unity of scope and segregation of roles must be established culturally trough the incentive models of a firm.

There is not much time left to postpone a cultural change. The time has come to foster the birth of a client centric culture that recognises, and compensates, the achievement of goals for the client before than for anyone else.

Portfolios that grow through performance will generate increased revenues at no additional cost. Portfolios that compound over the years, compound the firm’s revenues along with the number of happy clients.

The ability to focus on, and sometimes to help set goals for a client, rather than focusing on grabbing the assets of the client, is a rare mind-set in the asset management industry, notoriously a balance sheet centric world where the key to career success has become the ability to lie and to systematically fail the ethics, not the rules, of fiduciary responsibility.

It is hardly surprising that some politicians and some bankers always bail each other out; In fact few other industries, apart from politics and branches of finance have managed to convince the world that they are owed a fee independently of their ability to deliver what they promised.

In 1994 Charles Munger in a brilliant lesson at the USC business school stated; “…from the viewpoint of a rational consumer, the whole money management system is “bonkers” and draws a lot of talented people into socially useless activity…”

Social Utility is what I am talking about it`s about adding value through a process, the preservation and the creation of wealth rather than the transfer of it at all costs, including its destruction. Adding value to someone`s wealth is what money management organizations should concern themselves with, and what they should be paid for.

It is a fact that there are people and organizations out there without any sort of scruples that set out to deliberately seize clients assets to then manage them exclusively in their own selfish interests. However I do not believe that the majority of the participants in the financial rodeo belong to such a despicable kind. In fact I am confident that many are pushed into inappropriate conduct because the system educates and encourages them in that direction, and it compensates them for “the partner in crime” attitude rather than for an evolutionary conduct.

The system is short sighted, incentive models for all levels of employees are short sighted, and trading strategies are short sighted, investment results have to materialize constantly and rapidly, budgets have to be met quarterly, this is not the recipe to make things work out well.

Changing the system is a top down effort, and it is unlikely that a management that has successfully moved bottom up within a compromised system, possesses the wisdom, the ethics and the long term vision needed to bring about such cultural changes, even if their avoidance will ultimately result in their own extinction.

Regulators and politicians stand no chance to enforce such shifts in values, the ones for the lack of means and the latter for the lack of will.

I love Nassim Taleb, when standing boldly in front of audiences made up of financial experts, defines us all as becoming mad from the moment we walk into the office to the moment we walk out of it. His audiences do not find it amusing, and in fact it is not amusing because it is true; When in our offices, not only do we ignore how the system plays us against the basic values of civil society, and often also against our own values, but we also come to believe in a reality of power point slides made up of poorly applied statistical methods, on invented broadcasted numbers, to the extent that our decision making becomes groupthink with observable negative outcomes.

Be warned, or relived, this collective madness is not exclusive to the financial services industry, most multinationals that concern themselves with primary services to mankind, display similar patterns of collective unethical profit driven madness that is leading our world down a very narrow alley.

So who is going to change the asset management industry? Does it really need to be a slow self-destructive spiral of consolidation and disintermediation?

It’s my guess that in today`s global and cross border economy only the consumer can take an effective stance towards this madness. Only the end user can reward a company and its shareholders for producing and selling a great product or service, simultaneously punishing businesses unable to keep up with times; IPhone – Blackberry anyone??

Jeff Bezos’s famous quote; “your margin is my opportunity” should spook the hell out of the banking and asset management industry; an industry that offers a bad service at high fee is the ideal candidate for disintermediation. Creative entrepreneurs coupled to new technologies generate evolutionary forces that will rapidly identify and respond to basins of users trapped by inefficient and expensive service providers.

Trading and investment on-line platforms, Crowd funding, peer to peer lending, aggregators of financial information, and other web based providers are the first of a series of actors posing a viable alternative to consumers, while seriously threatening the expensive “bespoke or personal” solutions now days structurally void of substance.

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