Ideas...for helping investment managers win and retain assets
Ideas...for helping investment managers win and retain assets
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Managing Your Firm's Business Risks: Back to the Basics
March 2012

The volatile market conditions of 2011 led many investment managers to review and enhance their portfolio risk management practices. But ironically, investment managers’ business risk management practices sometimes remain an afterthought. As a result, investment managers can experience more revenue and profit variability than necessary.

This edition of Ideas reviews three basic business risks facing investment managers and offers suggestions for reducing these risks:

  1. Client Departure Risk
  2. Market Decline Risk
  3. Staff Departure Risk

Client Departure Risk

Client losses are sometimes unavoidable. For example, your role gets eliminated in an asset reallocation or performance lags for an extended period. But there are several ways to reduce client departure risk.

One way is to conduct a client feedback study. A client feedback study can identify how to make your client relationships strong enough to survive the inevitable periods of under-performance almost every investment manager eventually experiences.

Another way to reduce client departure risk is to have a great defensive game plan during periods of underperformance. The game plan starts with an examination of the causes of underperformance – not just market-driven but specific to your unique security selection and portfolio construction decisions. Decide if real enhancements are needed and why. Communicate enhancements clearly to clients and consultants – including supporting rationale. Clients and consultants may be apprehensive about process changes but most recognize the value of ongoing process improvement. Client communications should recognize the fine line between the two. Finally, involve your strongest communicators in client meetings, including Senior Management as appropriate.

A longer-term way to reduce client departure risk is to diversify assets by fund sponsor type, source and/or channel. For example, investment managers who built their institutional businesses on the defined benefit market but failed to penetrate other markets such as DCIO, wrap, sub advisory or insurance outsourcing have less diversified businesses and are more exposed to client departure risk.

Market Decline Risk

Most institutional clients have conducted modeling to optimize the risk/return characteristics of their investment portfolios. Optimizing the risk/return characteristics of your product lineup can reduce your firm’s market decline risk.

Are there obvious product additions or extensions that would improve the risk/return profile of your firm’s aggregate asset base and thus smooth your revenue flow? If so, how natural are these additions/extensions for your firm and staff? What additional resources would you need? Can you find seed capital for new investment strategies? What is the demand/supply environment for potential additions/extensions? If the answers line up product extension may make sense.

We also know of investment managers who hedge their revenue streams by buying puts on the market when they feel valuations have become excessive. If the market falls, profits on the puts help offset reduced client revenue.

Staff Departure Risk

Each year, one in every seven investment professionals leaves their firm. Yet there is no business risk investment management firms do less to prepare for than staff departures and succession. Staff departures often cause firms to lose clients and to be put in the marketing “penalty box”.

At a minimum, identify key positions where a replacement or succession plan is needed. For these positions, identify internal staff members who are capable of stepping in. Require key staff to work with the successors you’ve identified to develop transition plans in the event of resignation, retirement, termination, death, or illness. Doing this has four benefits:

  1. Provides a vastly improved foundation for smoother transitions
  2. Identifies your highest risk areas (positions where internal staff is not capable of stepping in)
  3. Helps your employees better understand their career path options
  4. Prepares you should clients and consultants ask about replacement/succession planning

How Eager, Davis & Holmes Can Help You Address These Business Risks

Client Feedback Study
Eager, Davis & Holmes has conducted Client Feedback Studies for investment managers for over 20 years. We offer an extraordinary combination of value added and cost efficiency.

Contact us to find out how an EDH Client Feedback Study can help you improve client retention, strengthen your overall client service program, and win more business from existing clients.

Investment Strategy Efficacy Enhancement
Do you have an investment strategy that needs efficacy enhancement? Hire EDH to examine and improve the efficacy of your investment strategies.

Whatever the strategy, chances are EDH has had intimate exposure to how dozens and dozens of similar strategies are managed. Drawing on this experience, EDH will identify problems and provide recommendations for improving strategy efficacy – including team dynamics, human resource issues, strategy design problems, portfolio construction and risk-management.

Replacement/Succession Planning
Using a six-step process, EDH helps you identify key positions for which replacement and/or succession plans are needed. Then we help you determine the best internal replacements based on experience, expertise and ambitions. Plans are then developed for each candidate.

Once completed you can focus on your ongoing business, knowing the potential impact of staff departures has been proactively addressed and minimized.

Consider retaining Eager, Davis & Holmes to help you. We know industry best practices and can make a difference for your firm.

Join Our Mailing List
Name*:
Title:
Organization*:
Email*:
Phone*:
  *required field
Managing Your Firm's Business Risks: Back to the Basics
March 2012

The volatile market conditions of 2011 led many investment managers to review and enhance their portfolio risk management practices. But ironically, investment managers’ business risk management practices sometimes remain an afterthought. As a result, investment managers can experience more revenue and profit variability than necessary.

This edition of Ideas reviews three basic business risks facing investment managers and offers suggestions for reducing these risks:

  1. Client Departure Risk
  2. Market Decline Risk
  3. Staff Departure Risk

Client Departure Risk

Client losses are sometimes unavoidable. For example, your role gets eliminated in an asset reallocation or performance lags for an extended period. But there are several ways to reduce client departure risk.

One way is to conduct a client feedback study. A client feedback study can identify how to make your client relationships strong enough to survive the inevitable periods of under-performance almost every investment manager eventually experiences.

Another way to reduce client departure risk is to have a great defensive game plan during periods of underperformance. The game plan starts with an examination of the causes of underperformance – not just market-driven but specific to your unique security selection and portfolio construction decisions. Decide if real enhancements are needed and why. Communicate enhancements clearly to clients and consultants – including supporting rationale. Clients and consultants may be apprehensive about process changes but most recognize the value of ongoing process improvement. Client communications should recognize the fine line between the two. Finally, involve your strongest communicators in client meetings, including Senior Management as appropriate.

A longer-term way to reduce client departure risk is to diversify assets by fund sponsor type, source and/or channel. For example, investment managers who built their institutional businesses on the defined benefit market but failed to penetrate other markets such as DCIO, wrap, sub advisory or insurance outsourcing have less diversified businesses and are more exposed to client departure risk.

Market Decline Risk

Most institutional clients have conducted modeling to optimize the risk/return characteristics of their investment portfolios. Optimizing the risk/return characteristics of your product lineup can reduce your firm’s market decline risk.

Are there obvious product additions or extensions that would improve the risk/return profile of your firm’s aggregate asset base and thus smooth your revenue flow? If so, how natural are these additions/extensions for your firm and staff? What additional resources would you need? Can you find seed capital for new investment strategies? What is the demand/supply environment for potential additions/extensions? If the answers line up product extension may make sense.

We also know of investment managers who hedge their revenue streams by buying puts on the market when they feel valuations have become excessive. If the market falls, profits on the puts help offset reduced client revenue.

Staff Departure Risk

Each year, one in every seven investment professionals leaves their firm. Yet there is no business risk investment management firms do less to prepare for than staff departures and succession. Staff departures often cause firms to lose clients and to be put in the marketing “penalty box”.

At a minimum, identify key positions where a replacement or succession plan is needed. For these positions, identify internal staff members who are capable of stepping in. Require key staff to work with the successors you’ve identified to develop transition plans in the event of resignation, retirement, termination, death, or illness. Doing this has four benefits:

  1. Provides a vastly improved foundation for smoother transitions
  2. Identifies your highest risk areas (positions where internal staff is not capable of stepping in)
  3. Helps your employees better understand their career path options
  4. Prepares you should clients and consultants ask about replacement/succession planning

How Eager, Davis & Holmes Can Help You Address These Business Risks

Client Feedback Study
Eager, Davis & Holmes has conducted Client Feedback Studies for investment managers for over 20 years. We offer an extraordinary combination of value added and cost efficiency.

Contact us to find out how an EDH Client Feedback Study can help you improve client retention, strengthen your overall client service program, and win more business from existing clients.

Investment Strategy Efficacy Enhancement
Do you have an investment strategy that needs efficacy enhancement? Hire EDH to examine and improve the efficacy of your investment strategies.

Whatever the strategy, chances are EDH has had intimate exposure to how dozens and dozens of similar strategies are managed. Drawing on this experience, EDH will identify problems and provide recommendations for improving strategy efficacy – including team dynamics, human resource issues, strategy design problems, portfolio construction and risk-management.

Replacement/Succession Planning
Using a six-step process, EDH helps you identify key positions for which replacement and/or succession plans are needed. Then we help you determine the best internal replacements based on experience, expertise and ambitions. Plans are then developed for each candidate.

Once completed you can focus on your ongoing business, knowing the potential impact of staff departures has been proactively addressed and minimized.

Consider retaining Eager, Davis & Holmes to help you. We know industry best practices and can make a difference for your firm.

Join Our Mailing List
Name*:
Title:
Organization*:
Email*:
Phone*:
  *required field