Nicsa, Author at Nicsa - Page 20 of 37

COVID-19 has wreaked havoc on business plans and flipped our social structure on its head. Founding members of the Diversity Project North America recently gathered to explore how to foster employee well being in this new work-from-home environment — all while keeping the spotlight on inclusion.

Nicsa’s Diversity Project North America is an active, cross-company group of leaders, that works toward the promotion and acceleration of diversity and inclusion (D&I) within the asset management industry.

The discussion featured experts from Ameriprise Financial, and BMO Global Asset Management, and Aon. (Listen to a replay here.)

“While there’s uncertainty around us, we need not only to take care of our physical health but our mental health,” said Rodolfo Rodriguez, Vice-President, Diversity & Inclusion at Ameriprise Financial. “Member firms of Nicsa’s Diversity Project are looking at ways to provide human-centered experiences where employees can express their concerns and vulnerability.”

In a recent survey from the Kaiser Family Foundation, 45 percent of Americans said that worry and stress due to the pandemic has affected their mental health.

“Clearly, this is an alarming statistic and part of the reason we are here today,” Rodriguez said. “In this new work setting, the need to prioritize mental health has never been greater. Empathetic leadership is key, alongside proactive efforts to increase mental health support for employees.”

HELPING EMPLOYEES ADJUST TO A NEW NORMAL

Niamh Fitzgerald, MD, Head of Client Management at BMO Global Asset Management (U.S.) said, “As with all of our D&I partners, mental health and wellness are always top-of-mind — not just during a time of crisis. However, it’s rarely been more widely needed as it is today.”

BMO is taking a wide-ranging approach to its focus on wellness and is looking to managers and employees to collaborate and connect with intent across the organization. The firm has added resources to its wellness app, set up a new employee partnership program, worked with health experts to host calls addressing employee concerns, and increased flexibility such as excused paid time.

“We’re really seeing people use this time to care for themselves and others,” Fitzgerald said.

Paul Olschwanger, Associate Partner, Strategic Initiatives & Human Capital Development at Aon, said that beyond official wellness programs and benefits, leaders at his firm are being intentional about inclusion and more willing to embrace different perspectives — whether they’re coming from a working parent or someone living in complete isolation.

“It’s still about getting the work done, but there has to be balance,” Olschwanger said. “We encourage our leaders to add a personal touch and spend one-on-one time with their people. The first questions should always be: ‘How are you and your family, and what are your challenges?’”

INCLUSIVE LEADERSHIP IN A VIRTUAL WORLD

What does inclusive leadership look like during a crisis? To that end, Olschwanger said inclusive leadership is about creating a sense of safety and trust that empowers employees to go further together than they could by themselves.

“For leaders who have been strong in the past in terms of inclusiveness, this will be the time to shine,” he said. “They will already have a community that realizes they are all in this together.”

Fitzgerald said decentralizing the decision-making process by building trust in teams and individual employees is crucial — as is leading with empathy.

“A leader in this virtual world needs to be quite humble,” she said. “They should be able to reach out and say, ‘I don’t know, how would you suggest we do this?’ — the key is asking questions, learning on-the-go, and adapting to this situation.”

Rodriguez said Ameriprise Financial’s leadership teams in marketing and human resources have created unique videos that bring the firm’s leaders into the homes of employees in an authentic and inclusive way.

“Those videos have had such a profound impact on our employees, because they were delivered with a great sense of humility, authenticity, and care,” he said. “It’s possible that this will redefine how we communicate with employees moving forward beyond our current crisis.”

HOW TO GET INVOLVED IN THE DIVERSITY PROJECT NORTH AMERICA

The Diversity Project North America promotes a diverse and inclusive asset management industry to deliver the best possible results for clients, reflect the society we serve, and ensure long-term business sustainability. Goals of the Project include driving innovative change through sharing and creating best practices, identifying gaps in the industry, and initiating actionable initiatives to eliminate inadequacies.

If your firm is interested in participating through collaborative leadership and strategy from executive business leaders, contact Nicsa. Follow the Diversity Project North America on LinkedIn for more information and updates.

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As advances in technology and other trends continue to reshape the role of the financial advisor, it’s clear that an agile approach is key. Members had the opportunity to explore the most important actions advisors are taking to change their practice and what they will need to be ready for the future during Nicsa’s SLF in February 2020.

Scott Smith, Director, Advice Relationships at Cerulli, moderated the panel, which also featured experts from Invesco and Morgan Stanley.

“A little over five years ago, it seemed like robo-advisors were going to put all of us out of business, and the self-directed market was going to explode — obviously, we haven't seen that happen,” Smith said. “The rather surprising thing is we’ve seen the advisor-reliant class grow from 32 percent to 39 percent from 2013-2019.”

Smith said Cerulli hypothesizes that the more clients began experimenting with DIY tools, the more they realized the value of the financial advisor.

Nathan Dierking, CIMA, Senior Vice President, Divisional Sales Director at Invesco, said that while everyone’s familiar with the Orwellian future depicted in 1984 (in which an entity tries to control people by withholding information), there’s a philosophy that’s relevant to financial advisors on the other side of the coin.

“Philosopher Aldous Huxley’s biggest fear was that society would overload us with so much information, we wouldn't know what to do,” he said. “And that's kind of where clients are right now. The biggest challenge we see from a demand-for-service standpoint is trying to communicate in a way they understand, providing simplicity amid all the noise.”

Smith said traditional advisor assets in a fee-based relationship (vs. brokerage) came in at about 24 percent in 2005 where the fiduciary standard of care applied. “By 2018, that figured moved up to 46 percent, and we anticipate it to crest over 50 percent by the end of 2020,” he said.

Matthew Scott, Vice President, Business Development Manager at Morgan Stanley, said the difference could be attributed to a change in the FA value proposition.

“Many in the industry started out cold-calling as brokers, whereas today we’re focusing on holistic wealth planning and what I like to call family wealth management — so there’s been an evolution in terms of advice,” he said. “The other thing is, our platforms are better able to handle a wider array of assets and solutions.”

PORTFOLIO ALLOCATION MODELS

Smith said advisors have historically placed building their own portfolios at the core of their value proposition.

“The way I like to explain it is that they consider themselves chefs — they have recipes, put them together and end up with great portfolios for their clients,” he said.

“But when we look at the numbers and talk to our partner firms, advisor performance is often less than outstanding in this particular part of their business. We are very much encouraging them to rely more on third-party asset managers to get those recipes instead of developing their own.”

To that end, Dierking said the demand for asset allocation models is increasing in a meaningful way.

“Advisors are realizing they’re not being rewarded for being a PM as much as they are taking care of clients from a total wealth management perspective,” he said. “And now, there’s the ability to take these models and add complexity to them, while still keeping them somewhat turnkey, which will be a key component in the future.”

Scott said advisors are waking up to the fact that they will be spending more time managing their client relationships due to the demand for advice, and that they will need to decrease the amount of time they're spending on investments.

“That’s tough for those who got into the industry in the ‘80s and ‘90s,” he said. “We’ve found that for many folks, dipping a toe in the water leads to success. They find a partner that they've followed for a long time, and use them as a core portion of the portfolio. This way, they ease into it over time.”

Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the Nicsa panel, they do not necessarily reflect the views of Nicsa or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.

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FinTech firms are increasingly making an impact on the asset management landscape — but what specific forces are driving this disruption, and where will they lead the industry? Members explored this topic during an interactive educational clinic held at Nicsa’s latest SLF event in February of 2020, moderated by Dennis Gallant, Senior Analyst at Aite Group, and featuring leaders from Fidelity and Financeware.

"The Achilles heel for any retail advisor is his or her capacity, both in time and knowledge,” Gallant said. “If you're advisory based, if you're offering financial planning, there are only so many clients you can provide those services to — so advisors are seeking out new ways of expanding their business.”

In turn, they are reinventing their roles.

“At the end of the day, investment management is becoming a smaller and smaller piece of the business,” Gallant said. “Few advisors are ‘baking the cake from scratch,’ so to speak, in building out their investment portfolio, and underpinning all this disruption is digitalization in all of its forms.”

Tricia Haskins, Vice President, Digital Strategy and Platform Consulting at Fidelity, agreed.

“One of the major trends we’re seeing is the changing role of the advisor — what was once focused on choosing stocks and mutual funds is moving to more of relationship orientation,” she said. “What we call that at Fidelity is the advice value stack.”

“Technology is absolutely helping advisors move up that value stack, which creates a tremendous amount of opportunity when they find that their unique value proposition isn't necessarily managing the money.”

“We’re not looking to create the next Uber,” he said. “That takes a lot of money and a lot of risk. We want to make sure that we’re prepared for what’s coming at us, but only if it’s relevant to our industry, our value proposition, and our customers.”

The group also discussed how robo-advisors are disrupting the wealth management industry, with Haskins commenting that instead of taking over the businesses, she believes robo-advisors ultimately help advisors scale their businesses as the needs of end clients become more complex.

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Asset management firms know that a data-driven approach can help them make smarter, more informed decisions. But should they be searching for the elusive data science unicorn — a seemingly mythical leader in problem-solving, business, and technology?

A panel of experts explored this question during a breakout session at Nicsa’s SLF in February 2020. Brian Foote, Vice President, Data & Analytics at Broadridge, moderated the panel, which also featured experts from Delta Data, Janus Henderson Investors, and T. Rowe Price.

Shonyel Lyons, Vice President, Enterprise Data Governance at T. Rowe Price, said the ideal data scientist possesses more than just programming and analytical skills.

“I would define a data scientist as someone who can take complex business problems, filter through data, apply intellectual curiosity, and come to a solution — a model of sorts — that can help the business move forward with that particular challenge,” she said.

Finding and Managing Talent

Whitfield Athey, President and Chief Executive Officer at Delta Data, agreed that it’s crucial to find an ideal balance between business and technical expertise in a data analytics team — and when he identifies that balance, he hires the candidate — even if there isn’t a position open.

“For us, finding these ‘unicorns’ is similar to finding the type of people we look for in almost any role,” Athey said. “It’s assumed they should know where the data is, how it's structured — who you’re really looking for is someone who can retrain themselves.”

Since technology evolves so rapidly, Athey stressed the importance of continuing education. He recommends checking out programs from institutions such as Stanford and MIT. “Constantly retrain your staff,” he said. “It also helps with retention because they know they don't have to leave to go learn what's next.”

The panel also discussed the importance of a data science translator — a liaison between executives and data scientists who can maximize business returns by distilling insights from data, and effectively communicating those insights.

Todd Neese, Vice President, Head of Business Intelligence at Janus Henderson Investors, said data science translators are somewhat of unicorns themselves. But they’re important in keeping data scientists satisfied with their jobs and eliminating communication stress.

“Some people are comfortable working with a computer, others want to interact with people, and finding a combination of those skills in a single person is a challenge,” he said. “To tie those two worlds together, I usually look for people who enjoy helping others.”

FinTech firms are increasingly making an impact on the asset management landscape — but what specific forces are driving this disruption, and where will they lead the industry? Members explored this topic during an interactive educational clinic held at Nicsa’s latest SLF event in February of 2020, moderated by Dennis Gallant, Senior Analyst at Aite Group, and featuring leaders from Fidelity and Financeware.
"The Achilles heel for any retail advisor is his or her capacity, both in time and knowledge,” Gallant said. “If you're advisory based, if you're offering financial planning, there are only so many clients you can provide those services to — so advisors are seeking out new ways of expanding their business.”

In turn, they are reinventing their roles.

Tricia Haskins, Vice President, Digital Strategy and Platform Consulting at Fidelity, agreed. “One of the major trends we’re seeing is the changing role of the advisor — what was once focused on choosing stocks and mutual funds is moving to more of relationship orientation,” she said. “What we call that at Fidelity is the advice value stack.”

That value stack suggests that advisors start by managing their clients' money, build upon that to help clients achieve their goals, ensure they are free from financial worry, and then, ultimately, help clients find fulfillment and actualize their dreams. “Technology is absolutely helping advisors move up that value stack, which creates a tremendous amount of opportunity when they find that their unique value proposition isn't necessarily managing the money.”

Will Dolan, Chief Executive Officer at Financeware, said that it’s important to keep our eyes open to the latest innovations, but changes will happen incrementally with a forward-thinking approach and strategic planning. “We’re not looking to create the next Uber,” he said. “That takes a lot of money and a lot of risk. We want to make sure that we’re prepared for what’s coming at us, but only if it’s relevant to our industry, our value proposition, and our customers.”

Gallant said the rise of the robo-advisor has contributed to consumer empowerment. “Customers now have more insight, more knowledge,” he said. “You don't go to a car dealership and learn all about the car — you do your research first. That consumer power is trickling down in the advisory marketplace as well.”

Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the Nicsa panel, they do not necessarily reflect the views of Nicsa or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.

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Nicsa members received an in-depth look at vendor oversight programs from the perspective of both asset management firms that have outsourced key functions and the service providers they’ve hired. The event took place in February 2020.

Marc Lotti, Partner, Division Head, Cybersecurity and Risk at ACA-Aponix moderated the event, which also featured thought leaders at SS&C Technologies, Inc., Putnam Investments, Vanguard Group, Inc., and T. Rowe Price.

David Cook, Manager-Procurement at SS&C Technologies, Inc., said that from the vendor side, the enhanced need for risk management has led clients to demand more formalized and centralized governance.

“This is an important topic for our customers,” Cook said. “The number of audits conducted by our customers have quadrupled in the last three years. In addition to that, any time we respond to an RFP, there’s a section on supplier risk management.”

Lotti asked about the classification scheme asset management firms use to identify high, medium, and low risk vendors. John Ingold, VP, Head of Third Party Risk at T. Rowe Price, said his firm focuses entirely on inherent risk.

“Without taking into account their control environment, if a vendor represents a material risk to our ability to deliver continuous services to our clients, then that is a Tier 1 vendor,” Ingold said. “Vendors that don't represent that risk, but that do have access to volumes of personal information, will be in Tier 2. Same with vendors that support our compliance obligations.”

He clarified, however, that many Tier 1 vendors have built-in controls, so they’re not that high-risk after all. “We see more risk flow through to the organization from smaller vendors that are performing novel services,” Ingold said. “FinTech would be the most recent wave of such vendors.”

Lotti said a recent Gartner report noted that some of the best risk mitigation occurs when you have good relationships with the business owners — and Sheila Butze, Director, Market Data Services & Corporate Procurement at Putnam Investments, agreed.

“The key is to have vendors involved in risk management from the get-go, so they clearly understand their responsibilities and roles,” Butze said. “You have to have a good relationship to have those conversations — they’re tough conversations.”

Dawn James, Head of Third-Party Risk and Governance, Vanguard Group, Inc., said her oversight committee has the power to veto extremely high-risk vendors.

“We find it most difficult with multifaceted providers who service several parts of the business,” she said. “I might have a supplier who provides me a low tier service, while they might provide my colleague a service that's deemed critical. That’s a nuance we are working really hard on because who has responsibility for the relationship gets fuzzy.”

Another important consideration is fourth-party risk — that introduced by a service provider that uses its own third-party vendors.

“When we're assessing a service provider who is or may be using downstream parties, we really want to start by learning whether they have a third-party risk program and trying to evaluate its adequacy,” Ingold said. “We all talk about ‘Trust, but verify,” but there's a pretty big degree of trust here. And so that's why for us, the effectiveness of the third-party risk program is critical.”

Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the Nicsa panel, they do not necessarily reflect the views of Nicsa or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.

A diverse panel of tech experts took the stage at Nicsa’s recent SLF to share their perspectives on the asset management industry’s digital transformation trends — from blockchain and artificial intelligence (AI) to behavioral biometrics and cybersecurity. The session, moderated by Lyndsay Noble, Director of Data Science at SS&C, featured thought leaders from BNY Mellon, Securitize, and Fidelity Investments.

Beyond Blockchain

Carlos Domingo, Co-Founder and CEO at Securitize, said the biggest misconception surrounding blockchain is that it’s being promoted as a solution for the world’s largest problems.

“Blockchain, in particular, only solves certain problems where you have a number of people who need to collaborate on the same set of data, and they need to trust that data without a centralized entity that controls the flow of data,” Domingo said.

And, although Bitcoin was invented 10 years ago, blockchain as a technology suitable for the enterprise environment is still in its early stages. “It reminds me of the beginnings of the internet — in blockchain, we are still in the dial-up era, if you will,” he said.

At the same time, Domingo said blockchain is a particularly useful platform for digitizing the representation of ownership. “We’re still at the forefront of the technology, but at the end of the day, in the world of securities, blockchain can provide better, cheaper, and faster solutions than traditional technology.”

Behavioral Biometrics and Fraud Prevention

Michael West, Vice President of Cyber Investigations at Fidelity Investments, said AI requires a mindful approach as well, specifically within the fraud industry.

“I hear quite frequently that people think you can use AI without understanding what the data means— and I think that’s a recipe for false positives and disappointment,” he said. “It’s almost become a threat to the anti-fraud industry because it’s getting a disproportionate amount of attention, meaning time and money.”

West said there’s a broad range of acceptability when it comes to AI causing customer friction.

“When you’re logging in somewhere, and your machine-learning modules might detect suspicious activity and requires two-factor authentication, that’s a very different interruption of a process than a machine learning process that attaches to restriction codes and can stop a stock trade mid-sentence,” West said.

Artificial Intelligence and Machine Learning

Michael Demissie, Head of Advanced Solutions - Machine Learning, AI, at BNY Mellon, said that while there’s ample emphasis on what machine learning solutions can do in a small, experimental setting, there’s not a lot of focus on how to deploy such solutions in production at scale.

“We need to put the same level of attention on the entire lifecycle in terms of what it means to maintain and monitor a machine-learning solution from a performance and support perspective,” he said. “Technology is often described as an easy plug-and-play solution when that’s not always the case.”

Still, AI and machine learning are driving advancements from the back office all the way to portfolio management in helping automate operations and investment decisions, among other processes.

“We are seeing a lot of benefits of AI techniques around blending disparate data and manufacturing intelligence and insights, and telling the stories of what the data are showing to sales and marketing associates so that they can activate it,” said Jane Conway, Digital, a data and analytics innovator for investment and asset management firms worldwide.

“I think the thing to remember is that the purpose of AI is the artificiality,” she added. “That it’s just a technique to pull together information to help humans make decisions better. We are the best, smartest machines. The challenge is, we can’t process gobs of data at once.”

It’s no secret that the upcoming presidential election may have a significant impact on the asset management industry — but what should we expect? Candi Wolff, Head of Global Government Affairs at Citi, gave Nicsa members her perspective on the issue as a keynote speaker at Nicsa’s SLF in late February.

Wolff, who served in the White House as President George W. Bush’s chief lobbyist, made history as the first female to hold such a position. Today, she uses more than two decades of government relations experience to identify policy issues that may impact Citi and the industry at large.

“This election is not about what the national polls tell us,” Wolff told Nicsa members. “It is about the electoral college, and it is about the swing states.” Whether those voters will re-elect President Trump comes down to two main factors — Trump’s job approval and the state of the economy.

“His job approval ceiling hovers around 46 percent, and presidents that get re-elected usually have approval ratings of over 50 percent,” Wolff said.

And while Trump, at least prior to the COVID-19 pandemic, has enjoyed high approval ratings with respect to the economy, those ratings don’t necessarily translate to electability.

KEY STATES

Wolff said the states that were significant in 2016 will again play a major role in deciding the 2020 election, namely Pennsylvania, Michigan, and Wisconsin. In fact, Wolff said that when she asks political operatives which state will likely dictate the outcome of the election, the answer is always Wisconsin.

“The reason for that is the electoral college requires 207 votes for victory,” she said. “President Trump had 306 in 2016. He needs to hold North Carolina, he needs to hold Arizona, and he will likely keep Florida, which is a state where his approval rates have remained constant. And if he does that, he only needs to win Wisconsin.”

On the other hand, if Trump loses in Arizona, Wolff said he has to pick up Pennsylvania or Michigan. And the latest polls show the democratic party ahead in both of those states.

“We’re also months out from the election, and things will drift,” she said.

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While the majority of today’s millionaires live in North America, the fastest growth is occurring in international markets. According to a 2019 study by Boston Consulting Group, revenue in Asia’s private banking sector alone could equal or exceed that of Western Europe by 2023.

Jennifer Hoopes, Senior Managing Director and General Counsel at Foreside, pointed to this study during a session on the future of the global investment market at Nicsa’s recent SLF. Hoopes moderated the panel, which also featured experts from ALFI, Allfunds, Matthews Asia, and Wisdom Tree.

“With the vast majority of growth in millionaires across the globe in Asia, Africa, and Latin America, we need to be considering opportunities in a radically changing global economy,” she said.

Laura Gonzalez, Head of Iberia & Americas at Allfunds discussed trends and opportunities for managers in Latin America, particularly in light of Brazil’s recent interest rate cuts.

“Brazil has been sleeping giant — a $1.3 trillion market is quite massive from an asset management standpoint,” Gonzalez said. “As of the last quarter of 2019, we have started to see institutional flows. Finally, pension funds in Brazil are targeting fund managers overseas. I wouldn’t say it’s an open market, but things are slowly progressing.”

Jonathan Schuman, Head of Global Business Development at Matthews Asia, said the near-term impact of COVID-19 on productivity for firms with businesses in Asia has been pronounced.

“Many of us at our firm lived in Asia during the SARS and bird flu crises of the 2000s, and the near-term impact, not just on public health but on economic activity and corporate earnings, can be quite acute,” Schuman said. “But if history is any guide, when the public health crisis is under control, the recoveries in Asian economies also tend to be fairly swift.”

Having said that, Asia continues to be fragmented in terms of distribution and regulation, so Schuman said it’s important to choose markets wisely. ”Fortunately, the region has several large markets, which can serve as the anchor of an expansion strategy, without requiring a sprawling local presence. Those include Japan, China, and Australia.”

Camille Thommes, Director General at ALFI, pointed to three general trends in the European market:

1) Environmental, social, and corporate governance (ESGs). “It’s no longer hype,” Thommes said. “At least in Europe, there’s a strong regulatory and political will — a European green deal — to channel firms and private money into sustainable economic activities.”

2) Venture capital fundraising. “If I just look at our jurisdiction, we had a growth rate of an average of 20 percent from one year to another.”

3) Investment strategies. “As has been the case in the U.S. for a very long time, passive has been extremely popular in Europe over the past couple of years, be it passive ETFs, active ETFs, or smart betas,” he said.

Ryan Louvar, General Counsel, Wisdom Tree, said he sees opportunities in multiple jurisdictions when it comes to ETF offerings.

“We see worldwide growth from about $1 trillion in worldwide ETFs about 10 years ago to over $6 trillion today,” Louvar said. “If there’s a bright spot for active, the active ETF market was about $5 billion 10 years ago, while today it’s over $150 billion in active ETFs globally, so there is growth there, including fixed income.”

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“The one thing I know for sure is that change will be constant,” Jeff Ringdahl, President and COO at Resolute Investment Managers told Nicsa members during a panel discussion at the 2020 Strategic Leadership Forum in February.

The conversation, which was moderated by Paul Kraft, US Mutual Fund and Investment Adviser Practice Leader at Deloitte & Touche LLP, and also featured leaders from Thornburg Investment Management and the Nicsa Diversity Project North America — was centered on growing, running, and serving the asset management business.

“At the end of the day, we are trying to attract the best and brightest managers and market our strategies back out to our clients,” Ringdahl said. “The other part of the business — running it operationally — changes so rapidly that we have to depend on outside firms to accomplish our goals.”

Jylanne Dunne, Vice President of Nicsa’s Diversity Project, agreed, adding that firms can take a gradual approach to determining their next step.

“You can be running your day-to-day business while also looking ahead,” she said. “What I’ve seen work for firms is the business lab approach: Taking a small group of people and testing out different strategies, outsourcing partnerships, and technology.”

Jason Brady, CEO of Thornburg Investment Management, said that such strategies are critical in an industry that isn’t always nimble.

“The investment management portion of this industry is like shipbuilding,” he said. “But elsewhere in the business, there’s such an opportunity to try things that could add value. There is so much room to change, and change quickly.”

Dunne said that improving Diversity and Inclusion in the global asset management industry is critical to that change.

“People are thinking about investing, and we see this in ESG investing for example, the same way they think about their food,” she said. “When they go to a farm-to-table restaurant, they feel very strongly about where that food came from. They want to know if it’s organic, that animals weren’t harmed, and that it tastes delicious. They feel the same way with ESG investments — they feel personally attached to it. This is a trend that is likely expand deeper into investor choices and it underscores the importance of viewing D&I through a 'business critical' lens.”

Ringdahl said his company recently invested a custom direct indexer with a significant ESG component.

“They ultimately provide a menu of causes that people can invest in,” he said. “The client and the advisor can customize the portfolio, which is important because ESG at its heart is a very personal thing for people — they don’t just want to take something off the shelf. Custom direct indexing will be a disruptor of ETFs.”

Finally, Brady also spoke to the opportunity in China’s asset management industry.

“The mistake people make is trying to replicate their business in China and say, ‘I’m a global asset manager, so I’m just going to place my capabilities in this context, and people will come to me,’” he said. “The correct strategy is adapting to the environment that you’re in.”

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Nicsa members kicked off the 2020 Strategic Leadership Forum in February with a deep dive into fee structures with Wall Street veteran Peter Kraus. For more than four decades, Kraus worked at major financial institutions — including Goldman Sachs, Merrill Lynch, and AllianceBernstein (AB).

In 2018, as a vocal proponent of pay-for-performance compensation models, Kraus teamed up with the Italian insurance company Generali to launch Aperture Investors, which he now governs as chairman and CEO. The asset management company, headquartered in New York, offers actively managed strategies with performance-linked fees.

Kraus opened the presentation with an overview focused on which investors are paying for performance, what’s incentivizing portfolio managers, and how the asset management business model is evolving to address structural shifts.

“In a global industry that’s quite fragmented with many players, change happens relatively slowly, so it’s not that easy to identify,” he said. “One of the things that has struck me over time is that we are, in fact, at a crossroads in the industry.”

This is especially true when it comes to the debate between active and passive funds. Kraus said that active flows are challenged because passive funds are providing a service that asset managers are not – and that’s the key issue. Ultimately, he said there is so much money in the world that it can’t all be actively managed.

“There need to be more passive funds — and fewer active managers, with fewer assets, producing more performance,” Kraus said. “If you change the fee model and you actually perform, you will make more money. Will it be easy? No. It will be more difficult, but you’ll make more money and be aligned with the client.”

The Aperture Approach

To that end, Aperture is building a fee model that aligns client outcomes with firm-wide revenue and manager compensation. “I don’t make any money unless the clients are making money,” Kraus said. “The managers get paid a small base salary, but they don’t make any real compensation unless they perform.”

Kraus then explored how the Aperture model affects the portfolio manager. Typically, he said firms and managers are incentivized to produce alpha, which means they emphasize capacity.

“Financial incentives drive managers to get big, and when they get big, they cannot perform at the same level,” he said. “It’s a fact. You lose performance — period.”

The Aperture fee structure changes that.

“Now the portfolio manager comes in, and I say, “What’s your capacity?’ and the math the portfolio manager does is, “Well, if I have $20 billion, I’m not going to perform, and I don’t get paid. But if I have 5 billion, and I can outperform by 5 percent, that’s a really attractive compensation because of the way the model works.”

Five percent of 5 billion, Kraus said, results in $250 million in alpha to the client. “The firm charges 30% of performance — that’s $75 million — and the portfolio management team earns $25 million,” he said. “That’s a very big number that should make any portfolio manager and team happy.”

Ultimately, Kraus said this model results in fewer managers who are managing less money — but it’s to the benefit of both clients and overall industry health.

“And I know, if you do the right thing for clients, you will win over time,” he said.

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