I have noticed a definite trend over the last number of years with respect to the convergence of the retail and institutional worlds within asset management firms.
It is not simply just a convergence of the product and service offerings, but also the internal alignment of the teams responsible for each business line.
The operating models that were at play 2-3 years ago had these teams run on separate lines, now firms are aligning their internal structures along functional roles as opposed to business lines, in turn blurring the line between retail and institutional.
So what is happening out there? What are the drivers? What is causal? What are the symptoms?
There are several key drivers that I see in play:
1. There is board and shareholder pressure to build leaner operating models that scale better and deal with financial market changes in a more flexible and predictable manner. This is borne out of the major flux we have seen in the financial markets since the end of 2008 and the renewed focus on operating costs.
2. There is a growing level of investment savviness amongst retail investors, in particular with the key market segment that has a high level of disposable income. These investors are demanding greater depth and breadth of information on their portfolios, thus driving the retail (product- focussed) reporting model ever closer to the client-focussed reporting model of the institutional market.
3. Institutional clients are demanding glossier client reporting artefacts – something which the retail side of the business are generally more adept at producing. This combined with the demands from the institutional sales teams and channels for product-like factsheet documentation for the various strategies and composites being marketed, is a key driver in getting the output production teams internally more closely aligned.
The results of these drivers are that internally the business lines are being remodelled and combined such that the retail (product) reporting structures are a by-product of the more bespoke client-focussed institutional lines.
The retail investor is also being offered increasingly complex products; synthetic ETFs, Absolute Return funds, Long/Short strategies and SMA/WRAPs.
In turn, retail investors are demanding increasingly complex statements and monthly factsheets – note the increase in retail asset managers offering detailed equity and fixed income attribution reports, both at product and account level.
Asset management firms have been quick to grasp the obvious efficiencies available by viewing the product side of the company as just another institutional client – thus enabling them to unleash the power of their considerable investments in client reporting solutions to tailor them for the retail line of business.
Another driver in the area which is driving consolidation of the systems that service both lines of business is the focus on building an investment product master to deliver a formal data quality management framework to support the considerable desire to produce better quality data and content in a more timely and efficient manner.
So in the future, we should expect to see more, not less, convergence of the business lines. Clearly, the two lines of business will always have clear demarcation lines in terms of level of service, reporting, fee structures and distribution, but the back- and middle- office teams and services that serve the business lines will see continued consolidation to leverage the obvious efficiencies and quality improvements being demanded by investors and shareholders alike.