Corporate and Public Affairs

Enhancing reputation through better alignment

In an increasingly converged asset management world, the strategic differentiation between investment sector (long-only, hedge, private equity, etc.) becomes decreasingly relevant. This has significant reputational ramifications for every sector of the industry, as the perceived sins of one will undoubtedly impeach on the character of the others. Obviously, at an operational level, the differences between the type of investments made matter substantially, but from an industry perspective, the lines
are blurring.

To the outside world, this convergence is not really that visible – because few outside of the asset management industry make the distinction anyway. Whilst this should be neither a surprise nor a significant problem in its own right, it is indicative of a wider issue: the overriding ignorance of how asset management works outside of the financial community.

The fund management sector has to take its share of blame for this. Investment products and services are primarily distributed through a series of professional intermediaries be they IFAs selling to private investors, private bankers creating portfolios for their wealthy clientele, actuarial consultants trying to match current and future pension liabilities for their clients, or any number of other “investment advisers” serving a plethora of masters. Even when investments are actually bought directly rather than sold, primarily this is through professionals as well – pension fund managers, fund of fund managers, and such like. Hardly surprising therefore that the fund industry has focused its educational efforts on this group of individuals rather than the world outside.

"...the world outside remains largely in the dark about asset management."

As a result, the world outside remains largely in the dark about asset management. This is a problem because it's, ultimately, the outside world in which the clients of asset managers live. The real clients are the current and future pensioners, the charitable beneficiaries, the citizens of an oil-rich state looking to diversify its economy, the employees of an entrepreneur, and so forth. Because of the levels of intermediation between producer and end consumer, asset managers have focused their resources on the immediate client rather than the end client.

Whether that was right or wrong is immaterial. It happened, but the time to change direction is fast approaching. Asset managers need to take responsibility for aligning themselves much more explicitly with the end beneficiary. Cost is one area that the industry needs to work on. As each level of intermediation extracts its slice, what’s left at the end often bears little relation to the alpha generated by the fund manager.

Similarly, politicians are generally drawn from the outside world. Although both of the UK houses have a selection of fund managers, brokers and bankers among their number it’s clear that the asset management industry in all its diversity is not well understood at any level. And it is not just in the UK. The EU’s AIFM Directive is a clear example of legislation based on a partial understanding of how it really works and a desire to curtail the activities of a group of individuals who are perceived to have got off lightly from the recent crisis.

This latter point reflects a significant misconception and a reminder of the monumental size of the task that confronts fund management. But the industry needs to help itself. By engaging with the legislature, we (as someone with 17 years experience in the fund industry I consider myself to be firmly part of that “we”) can go some way to creating a better environment in which we can operate.

"The popular media has not historically portrayed asset managers in an overtly favourable light...."

Managing the industry’s reputation is a vital part of that. The popular media has not historically portrayed asset managers in an overtly favourable light – focusing mainly on self interest, perceived lapses in governance, and the seemingly extravagant lifestyles of some (primarily, in recent years, in the hedge and private equity space, but in a converged world, no-one will note the difference). After all, why should they elaborate on the technical expertise of skilled asset managers when there aren’t enough people outside of the financial sector who understand it well enough to bother reading it or have yet worked out why they should care enough to educate themselves by reading it? And the popular press are hardly struggling to find examples of financial excess, even now.

Ultimately, its down to the industry to lead itself out of this problem. By taking responsibility for the end beneficiary, by aligning its interests with theirs and by taking the not inconsiderable time and equally colossal effort to educate those outside of the financial sector, the industry should thrive. If properly aligned a thriving industry means thriving beneficiaries.

2010 presents a challenge for the industry to begin the process of enhancing its reputation.

David Masters
Associate Director, Head of Alternatives & Institutional

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