As an adviser, there are a number of factors you’ll probably take account of when assessing whether to recommend a particular asset manager to a client – its performance record, its investment process, its costs and maybe its people. But how often do you take account of its size?
In business, getting big has often been maligned – particularly in service industries. The bigger companies are, the more impersonal they become, the argument goes. They can only deliver cookie-cutter solutions and lose their ability to act nimbly or innovatively.
That might hold true in some instances: the specialist bookshop that’s taken over by the national (then international) chain, the tiny local building society that used to assess mortgages on a case by case basis but has been taken over by a large bank and is subject to centralised lending criteria.
But then you look at some of the biggest and most admired companies in the world: Apple, Google, and Netflix and the argument doesn’t hold so well. In many industries now, scale is the key not the barrier to creativity, to the ability to take new ideas further and tailor solutions to different markets and customers. Most of all, scale is the key to being able to focus on what you already do well while still having the bandwidth to explore what you can do even better.
With the multiple headwinds that face our industry, that need for scale is increasingly evident in asset management. Right now every active asset manager business is wrestling with the triple whammy of intense regulatory scrutiny, downward pressure on fees and the continued challenge to deliver investors value-for-money solutions against a backdrop of ultra-low interest rates.
To survive in this environment demands huge cost efficiency and also the resources to keep investing in your business above and beyond the cost of regulatory change. Firms that can’t do this can quickly find themselves treading water.
Which is part of the reason why the merger between Aberdeen Asset Management and Standard Life makes so much sense. Here are two hugely complementary businesses with very little overlap: Standard Life is a leader in pensions, savings and solutions focused primarily on the UK, and its asset manager, Standard Life Investments, has an expanding global reach. Aberdeen is a global investment house, known particularly for its expertise in Asia and emerging markets. But at the same time, the two asset management firms have very similar cultures, sharing Scottish roots and a solid belief in bottom-up, fundamental investing.
Under the Aberdeen Standard Investments brand, we are creating one of the largest independent asset managers outside of the US, with highly diversified revenues, world-beating scale in equities, fixed income and property and a global distribution network serving clients in 80 countries from a network of 50 offices.
All well and good for your bottom line and your shareholders, a financial adviser might say. But how does that really benefit me and my clients? Over the long term, the first advantage for advisers and clients is stability. Given the pressures on our industry, the next 10 years could see a lot of upheaval as mid-sized firms look to shore up their position through sale or merger. Firms that take action now, rather than later, can choose a merger partner on the basis of who is most suitable not who is available.
The second is cost. The FCA’s recent Asset Management Market Study recommended an all-in-one fee for asset management. That is something we welcome but it is going to lead to greater scrutiny of what firms are charging. Because the revenues of our combined asset management business will be so diverse – and therefore should be resilient throughout the market cycle – we will have the breathing room to keep pricing our products competitively without ever sacrificing on quality of process, governance or service.
The third advantage is really about what clients are looking to do with their savings. Once upon a time, a retail investor who was supported by a gold-plated defined benefit (DB) pension scheme could invest their spare savings with no specific goal in mind – just the desire to beat the return on deposit.
But the decline of defined benefit pension schemes means the burden to invest effectively for retirement is falling squarely onto the shoulders of the individual. That requires asset managers to offer not just a stable of investment products but genuine investment solutions that are built to deliver on very specific required outcomes – both pre and post-retirement.
Such solutions can only be delivered by asset management firms with a genuine full-service, multi-asset capability. Standard Life Investments is already a market leader in defined contribution investment
solutions. Now, under the Aberdeen Standard Investments brand, we will be able to offer a complete spectrum of investment capabilities from core to specialist markets and asset classes, from active to quant. Quite simply, by having a wide range of capabilities available internally, a more cost-effective multi-asset, solutions-based offering can be made available to all investors.
We’ve made no bones about the fact that we are looking to build a world-class asset management company. In an increasingly cost-pressured world, that means a company with the financial strength to retain and attract talent and invest in its investment teams, to keep investing in technology and product development and to keep responding to changing investor needs. To do all that, size matters.
But on the issue of size, let’s come back to the example of the small specialist bookshop for a minute. In the future, we’re in no doubt that there will remain a need for small boutique investment houses with a specific area of expertise. As Apple and Google can attest, it is in these boutique businesses where the most disruptive and game-changing new ideas are often born, later to be taken mainstream by their larger peers.
So we envisage an asset management market that will migrate into two main camps: the small specialists and the large global players like ourselves. It will be the mid-sized players in between that may struggle and find themselves focusing more on how they can survive than on how they invest. Size may not be top of an intermediary’s list when appraising an asset manager but from now on it may well be a consideration.
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Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.