Comment: Fund boutiques, family offices, and asset management: Active management – phase-out model versus Confucius approach?

“Those who are said to be dead live longer”, according to the current press, the death of active fund management is often postulated. Robo Advisor ante portas, the popularity of passive funds, as well as the often controversially, discussed results of actively managed funds, give rise to a need for discussion. Additional irritation is caused by “pseudo-passive” approaches such as so-called enhanced indexing. If everyone looks at the costs and the opinion is that machines, rules, and top performance in asset management will set the tone in the future: Where is the niche for the asset manager who does not want to or cannot participate in this race?

Family offices and asset management

Private clients want to feel well looked after by their asset managers. This commonplace can be filled with meaning: Simply put, a clean stock-taking should be carried out, approaches to solutions should be discussed and outlined in terms of investment policy and products and decisions should be made and implemented – a mandate is given by the client. Risk management should be carried out, results should be documented. Besides, it should be possible to demand flexibility from the asset manager if the client’s life circumstances or personal financial history change. These services are usually combined with the skills of a good tax and legal advisor. The transitions in the areas of family office services and asset management are often fluid.

One often wonders in the public debate, but the majority of clients – whether HNWIs or average wealthy individuals in need of investment advice – are unlikely to expect an investment guru or performance winner for three, five, or ten years. Last but not least, the existence of traditional private banking shows that long-term customer loyalty is “multi-factorial”, so to speak. The performance of advice provided by family offices and asset managers may sometimes be drawn at the crossroads from pure advice to their product range. This specialist discussion is still controversial and committed – especially on the family office side. It is often forgotten that, in addition to asset managers, many multi-family offices are also dependent on the same type of acquisition when the dynamics in the area of “client referrals” diminish.

Active management and transparency

“Pseudo-passive” approaches often do not clearly show for many investors that passive investments need the active helmsman again. It represents already an active decision to deviate from the pure path of the exclusively passive Investments, one enters like with the overlay management in the reason an additional bet. When buying Exchange Traded Funds (ETFs), it is often forgotten that these must also be actively allocated as product components. Likewise, an active element in the world of apparently passive investment, often little considered in the discussion: A computer or rules are used to control quotas or macro-economists change opinions based on data. When programming or estimating, “derivative” so to speak, heads, talents, opinions are used again. The more this insight becomes clear to investors, the more the service element of advice and education in the management of assets comes to the fore again. This point sometimes gets lost in discussion: No active manager can give a performance guarantee, but neither can a rule or computer program. And purely passive investment in a combination of markets does not seem to be an acceptable solution for every investor. As is often the case, the truth can lie in the middle, perhaps it is the healthy mix of approaches that does it – diversification is trumps.

Mutual funds and independent asset managers

As mentioned above, no unilateral position should be taken here for active or passive investment concepts. This is the task of the scientific discussion. However, if one wishes to discuss the raison d’être of asset management in a more balanced way, one can conclude that many asset managers and family offices have perhaps positioned themselves disadvantageously in some cases or could perhaps position themselves more optimally today. In this case, this refers in particular to those addresses that have their mutual funds managed by specialized capital management companies such as Universal-Investment, Ampega, Hauck & Aufhäuser, and other providers in this segment.

The annual “greyhound race” to continuously win the top ranks in the performance hit lists is often hardly possible. Only very few asset managers convince over many years. These are usually successful with institutional investors and often have little to worry about positioning. Often forgotten are the majority of funds, which are relatively small or unknown, show average performance, and yet can still be an interesting addition to the portfolio for the investor – for family offices as well as for asset managers.

A thoroughly controversial aspect of advice can be that the client recognizes that the advisor’s products can mean that the manager makes himself transparent and vulnerable and engages in dialogue with the client. Under no circumstances does it have to mean that these products are massively used in the client portfolios. In addition to the use of third-party products, a diversification principle can mean that by purchasing a small, appropriate quota of the advisor’s product, the client obliges the asset manager or family office to exercise increased “attentiveness”.

Asset Management, Communication, and Confucius

Many of the parts mentioned above can be found in advisory services for private clients and high net worth individuals and cannot be easily transferred to institutional clients. Should independent asset managers and family offices increasingly define themselves through their core competencies of advice, know-how, and network, the demand on the client-side will be there. Many large family assets and foundations also live for many years with moderate, appropriate performance. The opportunity for the asset management sector lies in the creation of greater visibility for clients of their original performance as advisors, coaches, and risk managers. The client must feel understood, performance is only one of many factors for a successful long-term client relationship. The saying goes: “If you disagree on principles, you cannot give each other advice” (Confucius).


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