Asset managers will close out 2015 with the shared experience of having to manage multiple challenges to their business, be it sustained pressure to bring down costs, technological issues that wreaked havoc on fund pricing, or the continued flow of funds from mutual funds into ETFs.
Looking ahead to 2016, executives are focused on responding to regulatory demands, technological changes and managing market challenges.
"We are anticipating international markets outperforming domestic markets once again," Rusty Vanneman, the CIO of CLS Investments, tells Money Management Executive. "As a global investor we are looking for that."
As cybersecurity threats have become more prevalent this year, Fort Rock Asset Management CEO Jonathan Gane says his firm has taken a hyper-focused approach to providing cloud protection for his clients.
"We are very highly aware of cybersecurity," Gane notes. "So, when we started our selection process for a cloud provider, cybersecurity was very high on our list of key attributes."
Looking ahead to the upcoming year in asset management, Money Management Executive spoke with these fund managers and industry experts to discuss some of the challenges firms can expect to face.
Neil Hennessy, CIO of Hennessy Funds
What is the right approach for managers as fund product costs decrease and regulation costs increase?
Looking at the asset management business from my perspective, the mutual funds are 99.99% coin. Everything is disclosed. The costs are going up and they're going to continue going up with the exception of one cost, and that's management fees,
Management fees cannot be raised without shareholder vote. But, the SEC can raise their fees, the auditors can raise their fees, the attorneys can raise their fees, the cyber vision people can raise their fees, the post office can raise their fees - and you just go and you try to control it as best as possible - but costs are going up. What's happening is when you look at the mutual fund industry or the ETFs, is you have people that just want to have market share, and so they keep cutting their costs, and that's great, but do you really want to go broke?
I'm in the asset management business to make money just like somebody that entrusts us with our money; they're in the stock market to make money. They're not there to break even. As much as the publicity is out there and their regulatory authorities somehow give you the feeling that asset managers should just break even and do this for free and that is not my opinion whatsoever.
You are dealing with an extraordinarily clean industry in the mutual fund world. Part of the cost for the advisor that you have to eat now, from an expense standpoint, is compliance and the amount of safeguards you have to put it and then the amount of hiring consultants, and putting programs in for cybersecurity, let alone all of the documentation and the overseeing, the audits, your consultants and the costs have gone up greatly.
And, that hasn't even come to the question of the human cost. I would say 50% of the employee's time is built around compliance. That's a huge cost.
Will firms have to rollback their size or operations if decreased costs become a pressure?
I don't think they're going to have to lay off employees or do anything like that. They might have some redundancy if they made an acquisition. But most asset managers' profit margins are getting squeezed because of all this outside compliance and the due-diligence and documentation, but it has to be there.
Jonathan Gane, CEO of Fort Rock Asset Management
How do you expect the industry to be affected in 2016 by an anticipated interest rate increase?
As market volatility is expected to continue to increase next year, we firmly believe the rising interest rates are going to create opportunity for hedge funds through 2016. That's where we are focusing our time, on extra long short hedge funds and systematic managed futures strategies.
We think the rising interest rate environment should be beneficial for hedge fund strategies in general, and the traditional bond hedge to an equity portfolio may come under some pressure. That's where alternatives can really fit in with an investor's overall allocation strategy.
The way we're positioning ourselves is to benefit from increasing volatility going into 2016. We are reviewing all of our allocations to managers and making sure the managers we're investing with can benefit from a more volatile trading environment.
Is there any new technology that you are excited about?
We moved our operations technology into the cloud this year. This is a trend we aren't just seeing in the alternative space, of course, but with businesses in general.
We are very highly aware of cybersecurity. That's key to us. When we started our selection process for a cloud provider, cybersecurity was very high on our list. How you manage your cybersecurity as an asset management business is a concern for investors, so we had to make sure the provider we chose offered a security platform that fit our needs.
It was not economical for us to build our own infrastructure. This was not a problem as there are more and more cloud providers that understand the needs of a firm like ours.
Dan Sondhelm, partner and senior vice president SunStar Strategic
What are some of the marketing challenges managers might face in 2016?
The biggest challenge is distribution and to generate demand for your funds when there are just so many good asset managers out.
Distribution is getting more expensive. Financial advisors are very important to the asset management company and they're paying less attention in many cases. So, how do you cut through the clutter?
It's all about engaging the financial advisor. You can do it in many ways, but they all need to be thought about and reviewed for next year. Think about the sales effort or the sales team - actual feet on the street going out there. Their roles have evolved over the years ... and now it's all about relationships and meetings, and firms are realizing that it's a very expensive way to go.
What types of tools are out there to help managers become more efficient marketers?
I don't know if it's about new tools. It's about the tools that are just becoming more sophisticated. Some examples are supporting your sales team with email automation. So, you have your feet on the street doing what they do best, and then you have the marketing department who are sending out smart emails to financial advisors. Smart means responsive, and if the advisor opens the email, automatically a second email will come out.
These are not just a blast emails anymore, but custom campaigns that make adjustments to the engagement based on the behavior of the advisor.
And you can go down different paths. More firms are using the technology, but they're just using a sliver of the technology. They're not using it how Amazon.com would be using it, and that's ok.
Also, better usage of your CRM training to make the salesperson not only understand product knowledge but also how to get the attention of the advisor
Then there is, of course, data. The big guys are using it, but it's expensive. So, the mid-sized firms, and probably the upper mid-sized firms, and even the boutiques, are starting to consider investing in data so their sales team can be as efficient as they can be. They'll be calling on the right advisors and know the right information before even picking up the phone. It's that whole package.
How do you see shareholder outreach techniques evolving in the year ahead?
You can call it shareholder outreach or content creation, and I think that has really evolved in the last few years, where content can be disseminated to the right people very efficiently through your own technology and also through third party channels that are where financial advisors spend their time.
Some of the content can be placed for free and some of the content placement you pay for - webinars, for instance. But the creation of content in the form of videos, white papers and blogs are just becoming more powerful now because firms are realizing that fund managers are sought-after, influential, and need to communicate with the financial advisor.
And it's not just about the sales team. It's about the portfolio manager and they're trying to figure out how to create content that puts the asset manager in front of the advisor in a very cost effective way.
I think the big thing is increasing the quality of content and also the channels of content. The biggest firms are almost everywhere. They have a YouTube channel, Twitter channel and LinkedIn channel, and you have a channel for everything, even if nobody shows up there.
Rusty Vanneman, CIO of CLS Investments
What types of tech developments do you expect to see in 2016?
The way we've always approached our business is by working closely with financial advisors. It has always been high-touch. We just launched our robo last year, AutoPilot, in conjunction with Riskalyze, which does automated risk profiles.
Basically, it's an automated account-opening tool for advisors. With this tool, they are able to put in their portfolio, do a risk test and then the program is able to automate it and give it just allocation to move forward. We are trying to automate as much as possible.
How much will new regulations be a part of your 2016 outlook?
That's something that a lot of firms have recently bolstered and we have done the same. We have grown our compliance group, both in terms of the quantity of individuals in our staff, and the quality of our processes as well. Nearly everybody there is an attorney.
I've been in the industry for 25 years and there have always been good people in compliance, but I think we’re seeing a trend that overall credentials, experience and quality has improved in that area.