Welcome back to our blog series where we delve into the errors that have infiltrated the investment management world. In this second installment, we confront a significant issue that has subtly woven itself into our profession: the overshadowing dominance of economics over values.
Taking a moment for introspection, let's ask ourselves candidly – who could resist the allure of affluence? Over the past five decades, our lives have undergone a remarkable transformation. We now inhabit more luxurious homes, cruise in more extravagant cars, embark on exotic getaways, and embellish our larger spaces with exquisite art. Some even indulge in private planes and philanthropic endeavors. There's no denying that these shifts have occurred.
However, therein lies the challenge. We've allowed our focus to veer away from the fundamental values that underpin our profession. The economics of our business have taken center stage, shaping our decisions and actions. This shift is particularly evident on a personal level, where we now face a unique set of challenges.
Interestingly, our financial struggles have evolved. Escaping debt and funding our children's education are no longer our chief concerns. Instead, we grapple with a more intricate dilemma – how to ensure our achievements don't overshadow our children's personal paths. There's a real risk that our success might hinder their ability to achieve on their own terms, if we provide too much, too soon.
This error has far-reaching implications. It's time for a sincere reflection on our priorities. We must consider the ramifications of our choices not only on our own values but also on the values we impart to the next generation. In the upcoming segments, we'll delve deeper into this issue and explore how we can recalibrate our priorities, restoring equilibrium between economics and values. By doing so, we aim to create a profession that is both impactful and meaningful. Join us on this voyage of self-discovery and transformation, as we work towards a brighter future for investment management.
Amidst the pursuit of coveted rewards, it's possible that we've inadvertently lost sight of the vital questions that truly matter. The talented and competitive individuals drawn to investment management might find themselves trapped in a cycle of competition, fixated on material gains without pausing to challenge the essence of their efforts.
Consider this: Are we, as capable and driven professionals, neglecting potentially disruptive questions about the real value we bring? Especially given our exceptional skills and unwavering dedication.
Let's dissect how the profitability of investment management has surged over the past five decades:
Surging Assets: The amount of assets under management has skyrocketed, expanding tenfold. This meteoric growth has been continuous, with only occasional short pauses.
Fee Multiplication: Fees charged as a percentage of assets have multiplied more than fivefold.
Expanded Product Line: Investment managers have introduced a diverse array of products, each targeting different market niches. This diversification has broadened the scope of our services.
Leveraging Returns: The strategic use of leverage has magnified returns, contributing to enhanced profitability.
Technological Advancements: Technological progress has fostered more efficient operations, further bolstering profits.
While these accomplishments undoubtedly mirror our industry's success, it's paramount that we step back and contemplate whether our pursuit of these tangible rewards aligns with our core purpose. Have we become so consumed by material gains that we've overlooked fundamental questions about the actual value we deliver to our clients?
In the upcoming segments of this blog series, we'll continue peeling back the layers of these complexities. We'll explore the path of realigning our priorities and reaffirming the essence of our profession, with the aim of cultivating a more profound and impactful practice. Join us on this introspective journey as we endeavor to redefine our trajectory for a more purposeful future in investment management.
The confluence of these factors has wielded a potent influence. As a result of the investment management industry's robust profitability:
Individual compensation has surged nearly tenfold.
Enterprise values have skyrocketed.
The landscape of investment management's profitability, characterized by wide profit margins, modest capital requirements, minimal business risk, and assured long-term growth, has rendered investment management organizations prime targets for acquisition by colossal non-investment financial service entities, including banks, insurers, and securities dealers.
In the face of this scenario, investment management organizations have two fundamental choices. Some opt for independence, forging their path in a rapidly transforming landscape. Others embrace public markets, ushering in a new era of growth and visibility. Irrespective of the path chosen, the realization dawns that these organizations have transitioned into substantial enterprises, necessitating prudent management strategies.
As investment management organizations have grown in stature, it's not surprising that business managers have progressively taken the reins in senior leadership positions, supplanting investment professionals. This shift is accompanied by an increase in the dominance of business disciplines over traditional professional ones. Business-oriented disciplines channel the aspirations of driven individuals toward profit growth, often through "asset gathering." However, investment professionals recognize that expanding assets can be counterproductive to investment performance.
From the perspective of senior executives within large financial service conglomerates, whose evaluations emphasize profitability over investment acumen, business success hinges on the consistency and rate of profit growth. The larger the business, the more likely it is that senior management will prioritize profit enhancement.
In the realm of investing, fundamental shifts have been largely centered around new business development (to acquire additional business during favorable performance periods) and relationship management (to retain business over the long term, especially during periods of underperformance). These shifts primarily respond to the realities of the business realm, rather than the needs of the profession or the interests of our clients as investors.
When the business element takes precedence, it may not necessarily harmonize with the spirit of the investment profession. In cases where successful asset accumulation overwhelms an organization's capacity for superior investing, investor outcomes may wane. Furthermore, efforts to optimize business results, such as cost control measures, fee hikes, and pursuits of heightened "productivity," can inadvertently lead to diminished professional results.
Stay tuned for Part 3, the final segment in our blog series, where we will delve even deeper into these dynamics. We will engage in a discussion about realigning our priorities and refocusing on the core essence of our profession, leading to a practice that is more meaningful and impactful. Join us on this introspective journey as we navigate through these intricacies, striving to reshape our trajectory towards a more purposeful future in the realm of investment management.
Thanks for reading,
Don Bird
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