Consider those familiar images that can be seen in either of two ways, foreground becoming background and vice versa. So in the asset management world there are specialist images and generalist images: the very advantages of the generalist approach can turn out to look a lot like its disadvantages.
Cerulli Associates has devoted the fourth quarter issue of its The Cerulli Edge – Advisor Edition to a consideration of that “minority of investors who choose to narrow their universe of potential clients” by offering a targeted service to a specific clientele: institutions; retirement plans; or perhaps high net worth individual investors.
“The vast majority of financial advisors are generalists,” says Cerulli Director Scott Smith. One understands the appeal of this generalist stance: why turn away business? Why not accept the money of anyone inclined to invest it with you?
There’s an answer to that, though, and one of the advisors anonymously quoted in the issue makes it in a concise way, “I would rather be very relevant to a few than moderately relevant to many." An asset manager who caters to institutions, for example, can increase the value of his practice by providing support for proposal production. It can become very relevant to those few.
Numbers indicate that specialist advisor firms manage nearly twice as many assets as the industry average, and as Cerulli observes, this “validates the strategy.”
Institutional Specialists
One of the articles of this issue of The Cerulli Edge, “Friend or Foe?” looks at the asset managers who specialize in serving institutions (often endowments or foundations) as consultants and as outsourced CIOs. It makes the following points:
- Forty percent of the institutional specialist portfolios are within mutual funds and separate accounts.
- Such specialists account for less than 2.5% of industry advisors, but they punch well above their class, controlling $740 billion in assets.
- They have great success with small and mid-sized institutions, contexts in which they can leverage ”personal relationships and local reputation.”
So: how does an advisor become a specialist? Happenstance often plays a part. The specialty may come about because the exploitation of connections – a friend on the board of an endowment, for example, – leads that way. Though such “first victories” toward successful specialization may be chance, over time the building of a specialist practice requires sophistication and focus. In terms of resources, it also requires that the advisor put together the appropriate support services.
Business development must also address the sourcing mandates. After all, a common means of growth within the institutional world involves the targeting of small mandates that fly under the radar of the larger managers and their consultants. Almost 70% of the business of institutional specialists arises out of mandates with $100 million or less under management. Most frequently, much less: between $15 and $50 million.
Incubators and Match-Ups
In another of the articles in this issue, “Will the Real Wealth Managers Please Stand Up?” Cerulli adds that broker deals could “further the incubation of specialist practices” by for example providing business specialists who can coach asset management teams “that have the potential to evolve into a specialized practice.”
A related point is that “advisor productivity increases with teaming.” Broker-dealers may want to reach out to solo practitioners in order to “spark conversations” about their willingness to team.” The teaming-up – in asset management just as in l’amour – has to be a matter of compatibility, so the B/D should be in the business of “facilitating thoughtful matches.”