Great to good

Asset management firms enter a whole new world

Don Phillips 5 July, 2019 | 2:38AM

A colleague once observed that most companies had to be great at what they did in order to have a good business. Asset managers, on the other hand, he noted, need only be reasonably good to have a great business. For decades, that observation, if anything, understated the generous economics of asset management. Shops that vaporized client assets by pulling in huge sums at the peak of the tech boom, thus making them net destroyers of capital over most if not all of their existence, still enjoyed levels of profitability that most corporations could only dream of. In money management, for much of the past five decades, you could be demonstrably rotten at wealth creation and still have a highly profitable business.

Those days, at long last, are gone—and it’s a good thing. Investors don’t win in a game where there’s little penalty for those who create bad experiences. Capitalism demands winners and losers. In healthy markets, better players are rewarded and losers suffer. Only in state-sponsored enterprises, the type young socialists currently praise, is mediocrity rewarded to the degree it has been for so long in the asset management business. Real competition has come to the mutual fund world in the forms of passive strategies and exchange-traded funds. It is already clear that the asset management world of the future will little resemble that of the past. Greater convenience and lower costs for investors are now the industry’s dominant themes. The customer is at last king.

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About Author

Don Phillips

Don Phillips  Don Phillips is a managing director with Morningstar.