Successful investment firms don’t dodge industry realities
Culture is a big differentiator in determining the successful asset managers of the future
- Technology will speed up the rate of change in asset management over the next 10 years
- More attention needs to be paid to the workplace culture in people-oriented investment firms
- A successful business needs to blend stabilty and adaptability
The idea that asset management firms in aggregate in the next 5-10 years face weaker revenue growth and contracting margins is well known, caught as they are by a number of well-established trends. The speed of change will be mediated by many factors with technology driving a ‘speeding up in the speeding up’. We subscribe to Bill Gates’ view that: ‘We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.’
Asset management firms should have the opportunity to see the future as a choice to be taken with foresight rather than an outcome to be experienced with hindsight. The practice of many firms is centred on execution of one-year business plans. This is running existential risks given the frog in boiling water conditions that appear to be developing.
The successful firm should build its future from an agile blend calling for stability where possible and adaptability where necessary. Being agile reflects the ability to understand the landscape, read the changes ahead, and apply the shifts needed. The question of how asset managers across the size spectrum can achieve this is put forward in new research, published by the Thinking Ahead Institute, entitled the Asset Manager of Tomorrow.
The stability principles come from a strong and effective culture, while the adaptability principles are more likely to be drawn from the following areas:
- Smarter ways of working with technology;
- Deeper know your client/customer principles;
- Integration of sustainability into the investment model;
- Cohesion in values, beliefs, purpose and actions;
- Increased traction from more effective strategic relationship and partnership models.
As part of becoming more agile, asset management firms – in common with other companies – will need to re-imagine both for whom they create value, and how they do so. They will need to be more client-focused, and seek to meet diverse needs across the entire client life cycle. They will need to create value with and for a wide range of stakeholders – notably, employees, clients, investors, partners, and communities. We think asset management firms need to see ‘value’ differently. This includes both the what and the how of value creation in the investment industry chain – with more use of collaboration and co-creation models. For example, many systematic investment models bring together asset managers, asset owners and index providers in a collaborative product.
“Culture Is Demonstrably An Important Contributor To The Outputs And Outcomes Of Investment Firms Because These Are Inherently People Businesses”
The core value proposition of asset management firms is delivering wealth and well-being outcomes. This will increasingly reflect how well outcomes can be engineered and delivered. This is not easy to achieve without stronger partners. For the asset owner, this is building a small number of highly strategic relationships with asset managers. For the asset manager, it is finding better ways to be strategically valuable to asset owners.
The successful firm will be able to build and demonstrate its client value proposition (CVP). CVP is the outcome of culture and leadership, policies and actions that deliver value to clients in all services and products. We suggest investment firms should do more to measure their CVP and its complementary twin, employee value proposition (EVP). EVP is the outcome of culture and leadership, policies and actions that attract, retain and develop associates and teams.
How to measure culture
We take the view that anything can be measured. That includes culture, which, while being intangible, can still be measured in ‘soft data’ terms1. Here, the soft measure you get in assessing culture is subjective and partly self-reported with potential for issues of bias and accuracy. Those are challenges but they still leave room for significant meaning in the measures used.
Culture is demonstrably an important contributor to the outputs and outcomes of investment firms because these are inherently people businesses. But the difficult-to-measure and difficult-to-understand nature of culture has resulted in lower levels of attention.
Perversely, many firms are so hard-wired to the use of precise measurement that they omit culture altogether in their strategy, treating it as a non-controllable item. The dangers of this are particularly apparent when organisations confront growth and other changes as these put even effective cultures into mean regression. In these situations, it is only with considerable increases in the leadership energy and focus applied to culture that you can maintain its quality and consistency. We see culture as a big differentiator in determining the successful firms of the future.
‘Clients come first’ is an hackneyed phrase. How authentically this is put into practice is for asset owners to watch out for and means asset managers being assiduous with delivering a clear CVP. They can hide behind how subjective this may seem but there are soft measures that should be sought in client audits and client satisfaction scores to drill into this. What gets managed gets measured.
The case for diversity and inclusion is derived both from a business case and a cultural case, but they are inter-connected. The business case is based on diversity enhancing the influence of minority team members through differentiation, persistence and coalitions – producing more cognitive effort and wider perspective to arrive at novel solutions or come to more informed decisions. If this is your belief (and it is ours, albeit with some context to be added2), it becomes natural that you would wish your culture to be meritocratic and inclusive. We think diversity and inclusion will become very important aspects of asset manager culture in the future.
How can culture be changed? With difficulty. It helps to understand motivation in theory and practice and recognise differences of type here (see Deci and Ryan’s theory of motivation). Intrinsic motivations are those that are directly and freely entered into. Extrinsic motivations are those that are indirect and pressured into. So, doing something because it is inherently interesting or rewarding – like a passionate interest in investment markets – is intrinsically motivating.
But doing something because some other factor (like a bonus) is instrumental in producing a separable positive outcome is extrinsically motivating. Motivations provide incentives and the fact that people respond to incentives is a key economics principle. Both motivations work, but intrinsic motivations are deeper and more long lasting.
Investment firms of the future will evolve their cultural edge. All organisations have developed with a characterisation as ‘machines’ with attendant de-personalisation. Through this lens, their effectiveness will often seem to come from organisational design and strategy more than people factors. But we will increasingly see the importance of considering organisations through a living organism lens. In this model we can build a human and cultural emphasis that is overdue.
The employee finds human and financial value in the employee experience. This finds its way into the EVP which marks out human motivations in the autonomy, mastery, purpose3 and belonging areas that psychologists have identified as critical positive influences on workers. The force binding these together is culture and as we know culture eats strategy for breakfast.
1 Soft data is data that uses measurement to identify the characteristics of something that is inherently intangible or inaccessible and does so using subjective assessments – often through polls of opinion.
2 Diversity comprises surface-level attributes (gender, etc) and deeper-level acquired attributes (differences in knowledge, experience, ways of thinking, etc) and this context affects the cognitive diversity applied in problem solving. Cognitive diversity is generally seen as important in the context of complex and explorative tasks. The benefits of diversity where the tasks are simpler and execution focused are arguable.
3 Dan Pink’s book ‘Drive’ is focused on autonomy, mastery and purpose.
Roger Urwin is global head of investment content at the Thinking Ahead Institute