From the largest institutions to the smallest boutiques, today’s asset managers all face similar, well-documented challenges: regulatory requirements, pressure on fees, shrinking margins and more cautious investors. But for the start-up boutique, one overarching challenge in particular can create a major barrier to entry – the ‘institutionalisation’ of the industry.
Says Brian Anderson, an executive of SunGard Africa, a specialist financial services solutions provider. “With a growing list of operational, due diligence and compliance requirements that boutique asset managers must meet to inspire investor confidence and raise assets, it is becoming increasingly expensive and difficult to launch an asset management business. At the same time, however, the need to achieve institutional credibility is driving firms to focus as never before on improving their operational infrastructure. This in turn is helping them not only to increase efficiency and reduce costs, but also to seize the major opportunities that the market currently offers boutiques.”
For, in an uncertain investment climate, where room for undifferentiated, mid-sized firms is shrinking, many entrepreneurial, specialised boutiques have actually held their ground against the odds and prospered in their niche. Along the way, they’ve learned some valuable lessons that point the way for new boutiques to emerge and flourish.
In a study of more than 200 boutique asset managers in 38 countries, Tabb Group asked established firms what they’d do differently if they were starting up today. With the benefit of hindsight, the majority recommended getting operations in order before anything else. By prioritising infrastructure sooner, some felt they would have been better equipped to navigate regulatory requirements. Others wished they’d “thought big” from the start in terms of operational scale or had prepared better for growth.
The study entitled “Boutique Business Model under Attack: Bruised by Regulation – Crippled by Costs?” reveals that 51% of those surveyed, including firms in Africa, find the institutionalisation burden of due diligence and compliance as creating a barrier to entry. This now ranks as the top barrier to entry, moving last year’s top entry, the general cost of setting up operations, to the second spot at 44%.
“The large community of boutique asset managers in South Africa is facing these regulatory compliance and margin pressures. It’s a Catch-22 situation whereby boutiques pose less systemic risk than large institutional managers, yet due to the high cost of compliance and a proliferation of regulation they are the ones under greatest threat. So while the ‘too big to fail’ firms continue to raise assets, boutiques run the risk of being ‘too small to succeed’. They need to be more focused and self-aware as they navigate their way through this regulatory uncertainty. They need to invest in technology, improve their operational efficiency and look seriously at outsourcing any function that does not relate to their core competency of investing – especially those related to compliance and reporting.”
The good news is that, as well as the wisdom of their predecessors, today’s start-ups can benefit from a new generation of more affordable technology and cost-effective outsourcing arrangements. Several years ago, these automated, scalable, front-to-back-office solutions and managed services were simply not affordable for new boutiques. But the world of asset management has changed, and technology continues to adapt to its needs. So now, in fact, boutiques can start up as they mean to go on – with institutional standards of infrastructure that satisfy regulators and investors alike.
Michelle K Blumenau