What future do boutique fund managers have?

Last month, the US Department of Justice announced it would launch an anti-trust investigation into some of the leading technology companies, amid heightening concerns that a handful of market hegemons have become so dominant that they are stifling competition, leaving little room for smaller online platforms to participate, let-alone flourish.

The problem is not unique to the technology sector. The exact same problem is facing boutique asset and wealth managers, as a result of their increasing costs and the growing complexity of doing business, along with consolidation throughout the industry.

Right now, there is a bifurcation emerging in the asset management industry, insofar as the AuM (assets under management) divide between large brand name managers versus boutique providers has widened dramatically, as assets become increasingly concentrated in the former.

Many believe this is a direct consequence of complex and costly post-crisis regulation.

Rules such as the AIFMD (Alternative Investment Fund Managers Directive), MiFID II (Markets in Financial Instruments Directive II) and PRIIPs (Packaged Retail and Insurance-Based Products) continue to cast a shadow over the entire industry, creating overheads which – while more easily absorbed by mega managers – tend to disproportionately impact boutiques, saddling firms with added operational costs and increasing the barriers for new market entrants.

The changing dynamics in the UK’s discretionary wealth management and independent financial adviser sector are also having a negative impact on the investment allocations to boutique managers.

Both the wealth management and IFA industry have undergone enormous consolidation as they too deal with regulatory complexity and increasingly look to obtain economies of scale. As investment assets are now being consolidated into much larger pools of capital, they can only be deployed into strategies and managers that are capable of accepting sizeable flows.  

Again, the largest fund managers, who are focused on asset gathering, can easily do this, whereas boutique providers - which tend to have specialist strategies, with higher conviction - are far more disciplined about capacity and the liquidity that they can offer.

Irrespective, this consolidation in IFA/wealth management circles is further inflating the AuM divergence between boutiques and mega managers.

As a result of these challenges, industry-wide M&A is now at its highest levels for a decade and this seems set to continue, further widening the gulf between large and small asset managers. This situation is neither healthy for the industry nor its end customers.

Firstly, excessive consolidation at the top prevents retail customers from accessing best-in-class specialist investment strategies. 

Less choice may prevent retail customers from obtaining proper portfolio diversification, which not only dents performance but amplifies risk too.

According to Willis Towers Watson, the largest 20 managers control 43.3 per cent or $40.6 trillion of the top 500 fund managers’ total AuM. Do we really want the UK’s nation of individual savers exposed to so few firms?

Secondly, as asset managers acquire scale, it becomes more difficult to generate performance as it is harder to access smaller, niche investment opportunities.