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The future of recruiting, retaining talent in asset management

High-tech product change in asset management is transforming how firms hire talent.

As ETFs become more complex and the industry adopts new technology for product development, innovative firms like Direxion are shifting focus on who they want to attract, and what they need to offer a new breed of candidate.

Last year, the $14 billion-AUM firm hired a new president, Rob Nestor, previously at BlackRock, and later a head of product, David Mazza, OppenheimerFunds' former head of ETF investment strategy. Money Management Executive sat down with them to discuss hiring and compensation strategies, developments in the ETF space and the rise of robos. Excerpts follow.

Last year, the $14 billion-AUM Direxion hired a new president, Rob Nestor, previously at BlackRock, and later a head of product, David Mazza, OppenheimerFunds' former head of ETF investment strategy.

How have ETFs changed the way Direxion has approached new hires?
Nestor: One of the surprising things when I walked in the door was that there was not a dedicated head of product function at Direxion. In some respects, [this was] not completely surprising; it's a fairly mature platform and didn't need a lot of robust research and development in that regard. But from where I wanted to take the firm, it was absolutely crucial and necessary, which is why I asked Dave [Mazza] to join.

I think the premium in the industry is going to be not as much [about] really great functional expertise, like a tried and true product, even though I came out of that world. I think Dave is a perfect example. [He hasn't] been a head of product development in the classic sense, but he brought incredible commercial background, investment background and distribution background that I've asked him to bring together in a product management function.

"We've been building out the sales team to reflect our bigger footprint, our intended footprint, in the spaces as a distribution matter. But we're not currently on the massive hunt to hire a lot more people," said Rob Nestor, president, Direxion.

Is there a shift in the talent you are looking to recruit?
Nestor: I think so, and I think that's the natural evolution of the business. Taking portfolio management for another sort of example that has evolved very much to a data science and largely, not exclusively, a programming function. I do always say, though, you need people to land the plane.

Things happen, calamities happen, you've got to make judgments, but I think it's got to have that balance. You are seeing it in sales that used to be a relationship business. Now most people on the buy side are expecting the salesman or woman to be able to communicate at a technical level, or they just will ignore them. And so, yes, that program is really important.

How is that translating in terms of hiring? Are salaries or compensation — initial compensation, bonus packages, or so on and so forth — shifting toward any specific skills?
Nestor: I haven't observed a dramatic shift one way or another. You're asking for a wider, broader experience set, so you would think that's got to be a little bit of a driver up, and I think it is to some extent. But I think the counterbalancing is you're getting a lot more people, particularly in the ETF business that are more broadly experienced. So I haven't observed a dramatic shift one way or another.

Mazza: This is not necessarily having to do with Direxion, but this is sort of specific to some experiences I've had of being at three very different firms now; it's certainly manifesting itself on the traditional sales side.

Historically ... when you had a relationship-manager type approach, you could just really compensate them with traditionally low base salaries and then whatever they bring in. Now ETFs as a whole is very difficult to track, so that model has never really applied there to the same way, shape or form. But even so, if we are now expecting people to have more technical expertise, you would expect them to not necessarily have to be paid by bringing in a sale tomorrow, because that sale might manifest itself in six months.

So the cultural shift to the individuals who are maybe not getting paid tomorrow for something that's going to come in, because they actually have to maybe work harder to get that sale in a different way, is relevant. And I think that's probably just beginning to trickle its way [down]. I know some firms have been very vocal about that change, but others will likely have to follow.

Have hiring priorities changed?
Nestor: When I came in, the two major gaps were product and the home office, because, again, we weren't really relevant in the wire space. So those were the first two senior hires I needed out of that. We've been building out the sales team to reflect our bigger footprint, our intended footprint, in the spaces as a distribution matter. But we're not currently on the massive hunt to hire a lot more people.

With the proliferation of AI, will firms soon be seeking an entirely new kind of talent?
Nestor: For a firm like us, we have to be aware of those trends and be looking at where in certain areas we can borrow across. We have someone who comes out of that data science sort of AI background that is actually on our PM team and trading team. And we borrow him across into the products, so he's helped us think about some of those issues around 'let's not be siloed, let's take learning, let's take expertise and think about it in a fundamentally different function.' So he's doing some work with [Mazza] on some ideas that we have around that.

"Having someone who actually understands, not the packaging from the commercial side, but the packaging of how are we actually going to do this great idea, is extremely important," said David Mazza, head of product, Direxion.

Mazza: We are not going to go out and hire 10 data science people. One, it's not feasible, and it's not really prudent. But even someone who is on my team on the product side ... comes up in a very different way through the operations and trading and structuring of the funds. So having someone who actually understands, not the packaging from the commercial side, but the packaging of how are we actually going to do this great idea, is extremely important.

When push comes to shove, a lot of great ideas end up failing years down the road because people realize, oh, this is harder to manage than we actually think it is. On paper it looks amazing, but it doesn't actually work.

Are the smaller shops essentially waiting on the sidelines for someone like a Goldman to put out that AI tool?
Nestor: We would certainly be open to that. I mean, in my role, obviously, I have to sort of strike that balance between aspirations on all of these things or some major subset of these things, with the realities of we are a $14 billion, 40-person shop that has some capital to invest on that basis, but has to be careful about spreading ourselves too thin.

I think firms like us can get themselves in trouble by chasing too much. You really have to have conviction in what you are likely to be able to differentiate in the marketplace, and not just differentiate because we think it's differentiated. Are you as a buyer really going to appreciate that differentiation? Or are we just talking to ourselves because we're in the weeds every day?

So, yes, absolutely, we need to be always cognizant of that opportunity but pick our spots and put our chips on a few, just a handful of bets.

As a more niche shop, what are some of the challenges you see in chasing product trends set by some of the larger asset management companies like Vanguard, which just launched its first actively managed ESG fund?
Nestor: Traditionally the whole world, including most of the ETF business for as long as I know, has said, 'OK, everyone is a retail investor through Schwab or Fidelity's platform, they're an RIA or they're a wirehouse, or they're an institution.'

And while that's all true, and I'm not saying that's going away, in my mind it's more critical to say, 'But how do they invest?' They're either ... a tactical trader, a macro thematic investor or they're a strategic asset allocator. We have to figure out how to target on that basis.

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I'm not saying that's easy, but I think it's absolutely mission critical to be successful and to be able to cut through the noise and the cacophony of tons of players and limited eyeballs and the like. As we think about it from a marketing standpoint and a distribution classic sales standpoint, that's really how we're using technology on the marketing side to profile clients.

With giants of the industry sucking up all of up the oxygen in this space, you have to get creative with distribution. Is there a rethink in terms of trying to talk to advisors or talk to institutionals who may have considered leveraged products in the past as exotic?
Nestor: I agree with you absolutely that increasing the distribution is key. When I grew up in the industry, Dave grew up in the industry — although he's a lot younger than me — a good product deal was largely enough. But those days are over. There's a lot of great ideas out there, a lot of innovative stuff that we look at and say, 'That's kind of interesting, but they're going to really struggle when they tell their story.' Getting distribution right is absolutely crucial and it's been a mantra of mine since I walked through the door.

For us though, that is actually not about trying to expand. When you look at the numbers, when you read the consultant stuff and when you look at the surveys, that group of tactical traders is not really growing that much. So it's less about 'Well, that's good business, will it continue to be good business for us?' We think there's some opportunity to grow that.

A little bit of that is displacing options users or other derivatives users. It's not really finding new people and convincing them go use these things. And so then the obvious question is 'What are you doing then?' It's really about how we use our core DNA for product constructs to deliver a fundamentally different sort of value process. That's one of the disciplines I think that Dave has brought, as he's very clear about our DNA.

When looking at new technology, do you expect Direxion to follow what some of the larger players in the industry in either launching or acquiring a robo?
Nestor: There are no absolutes, but at this stage in our maturation, it's hard for me to envision that that would make sense for us.

I don't think it's a core competency of the firm, but your point was, do you think you are going to have to go out and get that competency at some point potentially through an acquisition? I don't think so, but I think we need to be always cognizant of that potential.

My personal view of the robo world is that there will be a couple of players that will get scale to have a reasonable business, like a Wealthfront and the like, but again, distribution is king, and brand is king.

So I had always felt like it was a little bit overstated that the Vanguards and the Schwabs and others, because they have the transactional intersection, would always be able to be fast followers, come in and either acquire or organically create, and it would be very, very difficult for the wealth fund.

I would say we are not actively searching for it but we are regularly approached and we are open to it. But I will tell you, there are no current plans right now to do that.

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