The institutional investor community is a close-knit one, and one that relies heavily on the effectiveness of a strong working relationship between the three decision-makers: the sponsor, the consultant and the money manager. But, like all close relationships, we can all get on each others’ nerves from time to time.
A white paper that was created in January 2007 specifically for the U.S. Institute(a membership organization of Institutional Investor)entitled How Institutional Clients View Money Managers explores the theme of what managers do that bugs their clients, based on a survey and personal interviews conducted late last year.
Should managers care about this? According to the white paper, “many said they wouldn’t hire a manager that constantly irked them.” And I’ve even seen examples of relationship problems with incumbent managers that have resulted in a very short fuse for weak performance, even unwarranted terminations in some cases.
I think the biggest mistake managers can make is failing to appreciate what their clients do and the issues they deal with, not only on a day-to-day basis but also on a strategic level. This can lead to bad habits such as those cited in the white paper including: “marketing of inappropriate products and producing unwanted market reports,” overloading clients with meaningless information and not responding to their needs.
A common misconception about institutional investors is that they spend their time hiring and firing managers. It is so much more than that. Institutional investors build portfolios. They do this with an increasing use of risk-budgeting techniques and consideration of more esoteric asset classes and strategies. Generally, each client is managing larger, more complex portfolios now with more managers, more reports, more meetings and more overlap in generic market information.
Decisions are driven by very specific objectives and predicated on unique governance circumstances. It is a full-time job and one that can’t be understood fully on the basis of quarterly meetings. Managers should not pretend to understand all the details unless they really do. And this is not as easy as it seems.
With each paradigm shift in the industry, expectations change and money managers must evolve quickly to remain relevant to their clients. First there was the shift from balanced management with peer benchmarking to specialized style boxes and attention to tracking error. Now it is towards customized benchmarks, liability hedging and return generating portfolios. The temptation may be to dump all sorts of information on clients without figuring out what they really need.
What can managers do to improve relationships and avoid bad habits that might negatively colour an otherwise strong investment relationship? Managers don’t help clients or themselves when marketing takes precedence over investments. Websites, inappropriate cross-selling and marketing events were identified in the white paper as a waste of time for managers. What is needed from managers is a focus on what clients really need from them–investment management!
Interestingly, the paper made the point that this is still a “people business” and identified “high quality people” as an indicator of excellence in the money management community. Investment management it seems is not about selling and delivering products. Rather, it is about providing professional services and advice based on knowing client needs.
Wendy Brodkin is the Director, Canada Business Development and Client Relationships for T. Rowe Price Canada.
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