The yin and yang of multi-boutiques
In the fourth article in a new series, Neeraj Sahai and Amin Rajan argue that boutique is a state of mind. Only savvy leaders can create it
In 2000, most asset managers ran vertically integrated units: all the activities in the distribution/investment/administration value chain were performed in-house. But as the decade progressed, their operating models became top-heavy as they ventured into new products, client segments, geographies and sales channels. Dis-economies of scale emerged with too many job titles and entitlements, and too many rules and procedures.
In response, asset houses embarked along two distinct tracks: virtual managers and multi-boutiques, according to CREATE-Research’s latest global survey ‘Exploiting Uncertainty in Investment Markets’*, sponsored by Citi and Principal Global Investors.
To start with, 9% of asset managers currently operate as virtual managers (bottom right box in the figure). Their popularity will grow - albeit very slowly - as asset gathering becomes the core competency of some of today’s very large houses.
In contrast, the popularity of the multi-boutique model will grow notably. Since, 2005, more and more medium and large asset managers have adopted the model. The pace has accelerated in the latest wave of M&A in which ever more newly acquired units have been absorbed within a multi-boutique arrangement to retain their distinctiveness.
Currently, some 50% of asset houses operate as integrated producers (top left box), down from 90% at the start of the decade. The number will continue to decline as they mainly create their own version of in-house boutiques in one of two forms.
Firstly, 7% of asset houses have independent boutiques with their own P&L within a holding company (top right box). Secondly, a further 28% have integrated boutiques, sharing support services as well as revenues with the ‘mother ship’ (bottom left box). In many cases, the integration is achieved by outsourcing middle and back-office activities to a common service provider. Over the next three years, another 18% will follow suit, making multi-boutiques the dominant operating model for medium and large asset managers in this decade, according to the survey.
The popularity of the model rests on the fact that asset management is a people business where size creates remoteness, remoteness creates detachment, detachment creates individualism, and individualism undermines alignment. Multi-boutiques aim to counter that by promoting a mindset change from entitlements to meritocracy, from blame culture to personal accountability, from weak management to strong leadership. But this transition has not been easy.
The multi-boutique concept runs with the grain of the craft nature of active management, which is inherently unscalable beyond a certain threshold at which costs rise faster than revenue in percentage terms.
The concept has primarily involved turning product teams into autonomous or semi-autonomous businesses with their own P&L responsibilities, giving investment professionals a significant economic interest in their boutiques within a matrix structure. They aim to encourage high-conviction ideas and their delivery in the belief that investment is a craft business where size is the enemy of alpha and alignment.
They also aim to cultivate a small company mindset in a large company environment. This involves going from: entitlements to meritocracy; from rigidity to agility; from blame culture to personal accountability; from weak management to strong leadership. After all, a boutique is more a state of mind than a physical structure. Failure to recognise that has created unintended consequences.
To start with, investment professionals have certain traits that enable them to excel in their narrow area of specialisation, but not run the business. Most of them like autonomy, but not the accountability that goes with it. They like titles, but not the territory they bring.
Thus, more autonomy has meant excessive individualism; more individualism has meant key person risk; key person risk has meant upward repricing of skills. Likewise, more accountability has meant risk aversion; common distribution has meant endless disputes in revenue sharing; separation of manufacturing and distribution has meant no focal point for innovation. The model has conflicting forces pulling towards too many centres of gravity.
As a result, internal politics, fear of failure, legacy issues, unrealistic and inconsistent expectations and corporate hype have sapped the emotional, intellectual and physical energy of senior executives who spent more time managing events than managing the business.
For them, walking a fine line between the oversight role of the centre and the entrepreneurial spirit of the boutiques has thrown up contradictions which require a high tolerance for ambiguity. The required DNA has proved hard to cultivate when there are so many legacy entitlements that are hard-wired into people’s job contracts.
Yet this does not detract from two key conclusions of our survey. Firstly, there is nothing inherently wrong with the multi-boutique model. Birth pangs are inevitable when new ways of thinking and working are introduced. Secondly, its success requires savvy top executives who avoid soundbite leadership, deal with the unintended consequences and thrive on ambiguity. Accordingly, three sets of actions are now being taken.
Firstly, asset managers are crafting a clear business strategy for the ‘mother ship’ as well as for individual boutiques, with clear pre-agreed business goals, their resource implications, their metrics, their accountabilities, their incentives, and their time lines. Incentives are targeted at achieving internal and external alignment - pension advisers like that.
Secondly, between the mother ship and the boutiques, there is a clear division of labour that seeks to deliver high overall operating leverage. The former sets the strategic vision for the group, manages global client relationships, designs incentive structures, leverages brand, manages the talent process, plans succession for key roles and, in most cases, oversees shared services. On their part, boutiques are responsible for getting the best out of talent, developing scalable strategies, promoting product innovation and nurturing personal accountability. Talented individuals certainly welcome that.
Thirdly, asset managers are investing increaasing amounts of money in developing the art of ‘leadership without authority’ among their top executives - in other words, influencing upwards or outwards or sideways those talented people over whom one cannot exercise the usual advantage of rank, status or power.
Like in a jazz band, influencing, improvising and listening are the saving skills. Lead trumpeters can select the melody, set the tempo, establish the key and invite the players. But that is all they can do. The music comes from something that cannot be directed: a relational holism that transcends separateness. Likewise in the multi-boutique model, these skills promote a common sense of purpose which ensures that the whole is greater than the sum of its parts. Shareholders demand it.
New operating models are only as good as the people who run them. They demand exceptional insights into mindset shifts required by change management. The quality of leadership will differentiate winners from losers.
Neeraj Sahai is Global Head of Citi Securities and Fund Services. Amin Rajan is CEO of CREATE-Research
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