At the Investment Company Institute’s Mutual Fund and Investment Management Conference, which was held in mid-March, Dalia Blass, the SEC’s Division of Investment Management, noted in her keynote speech that the regulator is concerned that competitive pressures are eliminating small fund families from the industry. As a result, the SEC is going to research whether barriers exist in the industry that prevents small fund families from competing against the largest players.
So what’s the cause for concern? Although the number of investment advisory firms has increased over the past few years, the number of fund families continues to decrease. Ms. Blass stated that she is concerned that increased concentration in the industry will limit investor choices. “As many as a third of managers could disappear over the next five year,” reports the Financial Times. Fee pressure is often cited as the cause for the consolidation, particularly as low-cost, passive products such as exchange-traded funds (ETFs) continue to penetrate the market. The Financial Times notes that in 2017 and 2018, the two largest fund families--Blackrock and Vanguard--captured over half of the global investment in mutual funds.
Additionally, distribution platforms such as Schwab, Fidelity, and others, have reduced the number of non-proprietary funds on their platforms. So as these firms capture more of the RIA custody market, fewer products are made available to RIAs. According to the Financial Times, nearly 5,000 mutual funds have closed in the past two years. According to Ms. Blass, the SEC is going to look into whether technologies could improve access to fund distribution, which remains the biggest challenge to small fund families.
But as many others pointed out after the speech, the SEC’s own rules and regulations are part of the problem. The SEC’s recent liquidity rule for mutual funds places a heavy burden on the funds and their advisers. The liquidity rule creates high fixed costs that can be absorbed by large fund families as they distribute those costs across hundreds of funds. But small fund families often have fewer internal resources to address such rules and a smaller shareholder base to distribute costs. The result is this rule is going to be cost-prohibitive for some small and mid-sized advisers that are managing or thinking of managing a fund.
The question for these small fund families and their advisers is how can they make a name for themselves in a world where the 800-pound gorillas are continuing to take shelf space?
A Strategic Distribution Plan Can Make a Difference
For small fund families and their advisers, the increased regulatory burden and fee compression create new challenges that cannot be ignored. Yet, they’re also not insurmountable. This ever-evolving environment is not only changing the way funds are distributed and sold, it’s also fostering a unique opportunity. Managers that are thoughtful and strategic in their approach to distribution have a clear chance to not only increase their market profile but to raise assets. The challenges that Dalia Blass mentioned in her address regarding smaller managers going out of business are very real, but they are also only part of the story. Fee compression and platform rationalization of investment products are serious considerations for any manager in the market...large or small. BUT, for those that are more thoughtful and strategic in their view, these challenges do not have to signal their demise.
There are still many opportunities to sell funds and investment products in the United States and around the world. Knowing what you do not know is a vital part of ensuring your success. By leveraging a partner, from the beginning, that can help to clarify the firm’s specific opportunity, how they attack it, where the pitfalls will be, what success will look like and when to expect it is essential to achieving the goal(s). To start, there is an extensive list of items that must be considered before launching a new product in a new market. A small sampling would be:
- What is the business purpose for this effort and does it fit our firm’s culture?
- Where should we sell it? US, Europe, the Americas, Asia?
- Which channels fit our firm and our culture? Retail, institutional, sovereign wealth, high-net-worth individuals?
- What vehicle is best? ’40 Act, UCIT, SMA, sub-advisory, Hedge Fund, etc.?
- Which distribution model is appropriate for our firm?
Having a strong product is only part of the equation as success will be determined not solely by investment performance, but also by the commitment and dedication of the firm to the effort. Additionally, understanding that in today’s market, investment products are no longer bought, rather they are sold, is the first step in the right direction.
Leveraging Technology Can Increase Operational Efficiencies
Advisers can also look at how to increase efficiency in their operations. Today’s small firms are largely built on manual processes often coordinated by single-person departments. A modest investment in key technology will free up personnel to focus on risk management rather than on data entry. For example, leveraging an inexpensive client relationship management tool, a document manager, digital marketing or a project calendar will address low hanging fruit and allow your in-house experts to do what they do best. How many of us have struggled to operate in a legacy environment of spreadsheets, post-it notes, and sign, scan and file certifications? It’s better to spend time working towards an end game, not struggling to get things to work!
One of these critical areas is compliance. New regulatory rules and filings increase the compliance burden. Using technology and complementary services such as CCO Tech’s compliance platform can lighten this burden and allow an adviser to focus more resources on distribution efforts. For example, CCO Tech’s compliance platform can be used to manage both the adviser and the fund’s compliance calendar and documents in a way that eliminates manual processes and improves operational efficiency. Our experts are familiar with both investment adviser and investment company compliance programs, and this expertise can be leveraged, when needed, to manage changes in regulatory rules or filings.
When evaluating technology, consider the following:
- Is the technology customizable and tailored to your business?
- Is the technology adaptable to changing environments and environments?
- Is the technology easy to use and cost affordable?
Need Help Evaluating Your Options?
At CCO Tech, we designed our compliance portal with a small firm in mind. Our technology is intended to supplement your team, not create new hassles. It’s hard enough to compete against external forces, it’s best to minimize internal obstacles that are holding you back. We also offer subject matter expertise to complement our technology so you can be sure your compliance program is buttoned up and exam ready. Additionally, we’ve partnered with Global Rhino to help bridge the gap between managing money and managing the business of asset management. By leveraging Global Rhino’s nearly 60 years of collective experience across distribution and business management within the financial services industry, Global Rhino can help you tailor solutions, specific to your firm, that will drive the evolution of the business towards future growth.