The structure of fund houses and wealth management groups, and the way they conduct their business, has never been more important. What we are seeing today is two conflicting camps battling to run the industry in their own image.
On one hand, the large investment houses continue to implement the multi-boutique systems, where a group is constructed from a variety of different units, with different investment philosophies, using a shared operational platform.
But on the other, the pressures of a crisis lead worried management to increasingly step into problematic areas in the group and impose a central control that runs contrary to the general management plan.
“There’s a fierce battle between the so-called centralists and segregationists,” claims Amin Rajan, chief executive of Create-Research, who helped draw the industry’s attention to growing strength of the ‘Village of Boutiques’ vision in a seminal report issued five years ago.
The multi-boutique model can be applied to 200 of the largest fund houses and wealth managers around the world and by mid-2008, calculates Professor Rajan, it had been implemented by 60 per cent of these. However, even before the current “financial tsunami,” the difference between the model on paper - with its attractive, multi-coloured presentations showing circles linked by arrows and dotted lines – and the stark reality was hitting those distributors being visited by self-promoting asset houses.
The majority of these claiming to operate a multi-boutique business have failed to create an effective business model with clear operating leverage, believes Professor Rajan, the key problem being “dysfunctional tensions” created by the rules of engagement.
While designed to boost creativity amongst investment professionals by giving them space to generate ideas, the danger is that many leading figures have become excessively individualistic, have refused to co-operate with other teams, have damaged morale and have had to be reigned in by top management, who have a lack of resources to effectively control their charges.
An indication of failure
Because there is a lack of direction at the top of the industry, management ends up becoming increasingly dictatorial because few board members have the experience to run decentralised business units, believes Professor Rajan.
“Yes, they gave too much autonomy to people on the edges, but they also shied away from creating the necessary framework of accountability, as dictated by common sense,” he claims. “They preferred a quiet life in which they didn’t have to confront their investment professionals. Centralisation is an outward manifestation of their failure.”
This will lead to a drain of talent from some groups when markets recover, he believes. But there are other firms, comprising about 15 per cent of the total, whose management had a global mindset and promoted genuine innovation and accountability. For these players, says Professor Rajan, “the model has secured clear bottom line benefits.”
BNP Paribas Investment Partners, about to take-over Fortis Investments in a move which creates a E500bn plus funds house, is widely seen as being one of the groups which has implemented the model successfully. Its chief executive, Gilles Glicenstein suggests this is because the group has had much longer to implement the necessary culture changes.
“Our multi-boutique model was created 10 years ago. But we recently decided to make it clearer to our clients by changing our name [from BNP Paribas Asset Management to BNP Paribas Investment Partners] and improving communication about the model,” says Mr Glicenstein. “We opted for a multi-specialist approach, as we don’t believe a big operation can succeed.”
Such a model can neutralise risks, allowing the group to concentrate on those investment practices that work best, while costs are saved with a common operational platform, says Mr Glicenstein, adding that fund houses owned by Axa, SocGen, Allianz and Deutsche follow a similar approach. But his remarks mask some of the problems many groups have encountered in implementing such a rigid model.
The challenge of integration
“It has been a challenge for all those organisations who bought US managers and boutiques late in the game,” claims Jean-Baptise de Franssu, chief executive of Invesco’s Continental European business. “They are now thinking: ‘Here comes the storm, the integration work.’ With us, all the integration work is done. We are not looking at the consequence of the crisis saying that we need to integrate. We are looking at it saying: ‘What do our clients want?’”
Mr de Franssu compares the situation to the last big crisis, the technology bubble of 2002/3, when his group, having absorbed eight acquisitions in six years, found itself bogged down with internal, organisational, rather than external, client-related issues.
The multi-boutique structure was once experimented with at Invesco, but is no longer favoured, says Mr de Franssu. “Maybe one could say there was a time when we were a combination of boutiques,” he reveals. “Certainly today, we are a much more integrated organisation. Costs are saved through a large-scale integration process.”
