NEW YORK & LONDON--(EON: Enhanced Online News)--Based on a TABB Group industry survey conducted in September 2013 of 202 boutique asset managers from around the world, over two-thirds of the boutiques say they have been overwhelmed by increasing regulatory requirements and the industry’s “institutionalism,” which has led to higher hurdles for raising assets and rising cost-to-income ratios. As a result of this unfavorable environment, boutiques are feeling the effects of a “big squeeze,” where the big get bigger, smaller firms prosper in a niche and firms in the middle are forced to shrink.
“Perhaps this is what the regulators wanted”
“Perhaps this is what the regulators wanted,” says Adam Sussman, a TABB partner, director of research and co-author with research analyst Valerie Bogard of “Boutique Business Model Under Attack: Bruised by Regulation, Crippled by Costs?” Forcing consolidation by increasing compliance costs, Bogard adds, would certainly make policing the industry more manageable. But regardless of intent, she says, TABB believes a dearth of boutiques would represent a negative for both the investor and industry alike. “A high degree of industry concentration is only likely to exacerbate the issues that cause investors to pause – cross-asset correlations, lack of outperformance and pricey management fees.”
Boutique asset managers have a unique arsenal of advantages as they are able to embrace entrepreneurialism and act quickly with few “middlemen” and little time-consuming bureaucracy due to their smaller staff sizes. Everyone likes to root for the underdog, Sussman says, but boutique asset managers are underdogs for a reason, and the most problematic issue that over 50% say they face in the next 12 months is the increasing expense of regulatory compliance – that costs are rising as new regulations are being implemented and enforcement agencies are conducting more inspections and demanding more requests for information.
While the Goliath-sized, “too-big-to-fail’ firms continue to raise assets, boutiques run the risk of being “too small to succeed, which is why the odds can seem stacked against a new boutique. Asked what their biggest barrier to entry was, over 50% pointed to institutionalization, the burden of due diligence and compliance. The larger firms, says Bogard, can spread costs across a significant revenue base but scale is the feature the boutiques know they lack. “Technology and better operations are the keys, which may include outsourcing, an emerging trend, named by less than 33% of the firms.”
Despite the obvious challenges facing boutique asset managers, Sussman says, they believe they have a more focused offering – a slingshot that can take aim at the Goliath-sized firms. “These advantages are embedded in the definition of a boutique: nimble entrepreneurs with a niche focus and ownership structure that incentivizes long-term sustainable businesses with a client-centric philosophy. It’s no wonder then that the three most popular cars that participants identified with boutiques were Audi (22%), Mercedes-Benz (22%) and Volvo (17%), showing a focus on conservative approaches and longer term value rather than flashy and fast investment vehicles. Only 16% related to a Ferrari.”
According to Sussman and Bogard, the question still remains: under attack by regulators, how will these boutique asset managers throughout the world survive the “big squeeze?”
The Executive Summary and full 17-page report with 14 exhibits can be downloaded at http://financialsystems.sungard.com/solutions/asset-management/campaigns/AM-AA360-Tabb-Boutique-Report.aspx.
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About TABB Group
With offices in New York and London, TABB is the only research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge’ research methodology developed by Larry Tabb. For more information, visit www.tabbgroup.com. In 2010, TABB launched TabbFORUM, the online capital markets community for peer-to-peer opinion and analysis covering current industry issues, tracked daily by 18,000-plus professionals.