The investment manager of the future

What does an investment management firm look like when it’s redesigned based on first principles and based on the true “jobs to be done” of an investment manager?

“Even millennial-friendly platforms like Betterment, RobinHood and Wealthfront are only approaching their businesses one-dimensionally,” said Suzanne Ley, formerly head of financial institutions at Westpac.

“We need to focus on how China is leading the way with its complete reinvention of how we think about money and investing.

For example, in just four years Alibaba’s Yu’e Bao fund grew to be the largest in the world. The walls between shopping, banking, investing and social networking are quickly evaporating.

The only name I can think of in the U.S. that comes close is SoFi — a full-service lending, money management and social networking platform is where we are headed.”

We outline below the five characteristics that will differentiate the winning investment management firm of the future:

Investment firms today
Investment firms of the future
  • Correlation models/predictive analytics based on observable historical data.
  • Data/data management as a competitive advantage.
  • Big data, AI and social media powering investment decisions.
  • A post-crisis regulatory environment focused on past crisis issues.
  • CIO communicating to clients/regulators.
  • Regulatory oversight with external boards.
  • Due diligence as a systematic, ongoing oversight and governance process.
Risk management
  • Asset class silo risk systems with static firmwide risk systems (e.g., counterparty risk).
  • Operational risk silos.
  • Risk-based on leading indicators not lagging.
  • Integrated, dynamic risk management across public and private/illiquid asset classes.
Alpha creation
  • Individual security selection, active fund selection and asset allocation with passive funds.
  • Investment theses expressed across asset classes including public and private/illiquid.
  • Influencing outcomes/activist investing.
  • Focus on cohesive culture.
  • Little real talent management.
  • Professionalize human capital management — workforce planning and leadership development.
  • Firm leadership as a professional CEO — not part-time CIO/sales.

Using technology to re-balance value to investors

Internally, money managers are investing in artificial intelligence and big data capabilities as well as a more seamless integration of front and back-office processes. Externally, leaders are building mobile and tablet apps and expanding their use of social media.

In the future, innovative models, especially in the retail space, will integrate investing with elements of social media, interactive gaming and education. For institutional investors, technology will enable more proactive, fully customizable risk management and governance. Firms like D.E. Shaw, Two Sigma and Renaissance Technologies have validated this quant model in the public markets. We now see firms like Versatile VC, Signalfire and GV using technology to produce better returns in the private markets.

Create and sustain trust through transparency

As opacity recedes, money holders will see who has been working with their best interest at heart. We foresee reduced interest in the black box hedge fund model.

According to Amanda Tepper, CEO of Chestnut Advisory Group, investors are increasingly demanding clear, concise and consistent communication from their asset managers. In a recent Chestnut investor survey, 92% of respondents said they view investor communication as integral to an asset manager’s mission. In addition to investor demands, money managers must comply with an increasing array of regulatory requirements.