GLOBAL – Consulting firm Mercer Oliver Wyman says the asset management industry should ditch the traditional institutional, retail and high net worth categories and reorganise according to the “professionalism” of investors.

The firm has written a report defining ‘professional’ as those who understand investment theory and are prepared to pay for investment return. ‘Non-professionals’ have limited knowledge are at the “periphery” of the business, Mercer said, adding that such clients are more interested in issues such as brand, compliance and pricing.

The shift could see, for example, a ‘mid-range’ pension fund without significant internal expertise categorised as “non-professional”, while large funds with substantial resources would be classed as “professional”.

Asked about the new structure would be marketed to pension funds, Mercer analyst Imran Gulamhuseinwala said: “Obviously you don’t want to tell a pension fund client that he doesn’t know anything about finance theory.”

The 44-page “Global Asset Management: Who Wants Performance?” report was published with broking firm Lazard Freres.

The traditional way of thinking is “dragging down” the asset management business, the firm said. Mercer argues that non-professionals are sold investment products while professionals buy them.

“There’s validity to it, there’s value to it,” said John Boneparth, head of Putnam Investments’ international business, about the report. “They’re right but so what – what’s new?”

Mercer says the two sides of the business are different. The non-professional segment wants scale, marketing, back office, product design, price and compliance – with investment performance as just one element. For professionals, performance is everything, Mercer said.

Boneparth said institutional customers want five things: “performance, performance, performance, performance and good service”.

“Performance and scale are incompatible,” said Gulamhuseinwala, adding that outperformance is diluted with more assets. “Scale encourages ‘groupthink’,” he said.

His colleague Julia Hobart said Mercer’s findings suggest an answer to why the asset management industry appears to be fragmenting and consolidating at the same time

The analysts put forward the idea of firms becoming “alpha platform providers” – meaning they provide a layer of infrastructure such as human resources and marketing muscle – into which alpha generating boutiques can plug.

“Deutsche is going in that direction,” Hobart said, though she declined to say whether Mercer Oliver Wyman had advised it. She said Mercer had talked with industry participants and found it was “pushing on an open door”.

Hobart said jobs were not necessarily at risk in the new scheme – although people would get paid differently in what she termed a “far from trivial HR exercise”.

Gulamhuseinwala saw the change benefiting investment consultants, but worried whether their staff were sophisticated enough.

Mercer Oliver Wyman is part of Marsh & McLennan Cos., parent firm of investment consultant Mercer and investment manager Putnam.

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