Imagine a world where:
- 38% of workers don't consider themselves financially well-off 1
- Parents of children born today will pay more than $120,000/year for a private college education 2
- Cities and states are short $4 trillion in pension liabilities 3
You don’t have to imagine, as this is the situation we are facing today. Access to a great variety of investment returns is an increasing necessity to meet escalating costs of education and retirement. Meanwhile, influential wealth managers are leading a trend toward narrowing the universe of investment options they make available. This may restrict access to some of the best return streams possible, posing a threat to investors’ attempts to keep up with rising costs. Are we creating an investor dilemma at perhaps the worst possible time?
There are downsides to everything; there are unintended consequences to everything.
Steve Jobs, Rolling Stone, Dec 3, 2003
Unintended consequences are outcomes that are not the ones foreseen and intended by a purposeful action. In recent years there have been substantial changes in product availability at some of the largest wealth managers who serve millions of investors. While the reasons are understandable, there may be an unintended consequence. The investment management firms that already hold significant market share and are less likely to be at the forefront of product innovation may also be the beneficiaries of contracting product availability. In fact, Unified Managed Account and Separately Managed Account products, a small number of industry leading firms control a disproportionate majority of the industry assets. If you found yourself to be such a dominant platform, would you be as motivated to invest capital in innovation?
So, instead of introducing competition, and the accompanying innovation that goes with it, wealth managers may be inadvertently reducing competition. Will this have the unintended consequence of limiting innovation in investment products, thereby restricting access to the best returns possible? Ultimately, will the investment management and wealth management businesses arrive at a similar destination as internet search engines? Perhaps you can name the number one search engine, Google. How about two through five? 4 Is that domination healthy? You read the headlines, what do you think?
Barriers to Entry
The only barrier to entry you can create is to consistently build a great product or service.
Aaron Levie, founder and CEO of Box
A "Barrier to entry" is an economic term describing the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business.
How familiar are you with the following statements?
- “You need a three-year track record”
- “You need $50 million of AUM”
- “You need existing demand”
- “You need to be research covered”
These are barriers often imposed on organizations that are developing new products designed to address some of the most difficult financial challenges for investors. If you are familiar with or have heard any of these, you have heard the equivalent of walls being built to exclude new market entrants. How can an investment entrepreneur bring a new product to market with these hurdles to overcome? All of these factors—track records, existing asset base and demand, and analyst due diligence—are obviously important for any wealth manager to consider as they build portfolios for their investors. But are these barriers unintentionally excluding tomorrow’s star investors? Is there a way for differentiated traditional investments to bypass these barriers? Should there be? Can wealth managers create a platform that permits smaller size, innovative or boutique managers to come to market while bypassing some of the above barriers?
Assuming that our business can attract the best and brightest of tomorrow, we also need to ensure that there is an ecosystem that provides an opportunity for creativity and entrepreneurial spirit today. Wealth managers and asset managers have partnered successfully for the benefit of investors for decades, and this partnership has led to significant financial success. Clearly, the competitive environment is significant, with fee and regulatory pressures arguably driving the barriers discussed above. However, rather than unwinding what has been built over decades, wealth managers and asset managers should find new ways to pursue meaningful innovation together.
One of the qualities that make our economy and country exceptional is that we have been and will continue to be a land of innovation. As an industry, we should be cognizant of the law of unintended consequences and be cautious about how far we go in building barriers to entry. In this way, we will continue to attract the brightest talent who will be the investors of tomorrow, providing the opportunity for the best possible financial outcomes.
1 2018 Bank of America Merrill Lynch Benefits Study
2 Vanguard, CNBC, March 17, 2017
3 WSJ Sarah Krouse, July 30, 2018
4 Top 5 Internet Search Engines: Google, Bing, Yahoo, Ask.com and AOL.com- Reliablesoft.net, 2018