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Focusing on the inconsequential is probably the single greatest enemy of the asset management industry today.
Let’s consider the active vs. passive management debate, for example. Is this raging dialogue helping clients realize their objectives? Or simply conditioning them toward short-term thinking, quarterly relative returns, and product comparisons?
Sadly, this debate is a symptom of our industry’s anchoring to short-termism and the “What have you done for me lately?” culture. It’s the wrong discussion and consumes too much of the asset management industry’s thinking. Instead, investment professionals should focus on the greater goal — improving client outcomes.
Both institutional and retail investors face an increasingly complex world. It is time to end the pursuit of red herrings and look to how asset managers can demonstrate their value and help clients meet their long-term investment goals.
Four Lessons from the Insurance Industry for the Asset Management Profession
There’s no panacea to magically cure all that ails the asset management industry.
There are, however, some powerful lessons we can glean from the most unexpected of places — the unexciting, unsexy, and unheralded insurance industry. Particularly its asset management discipline.
Much like other businesses, insurance companies need to be successful in their long-term investment management because insurance is vital to our economy. But transforming this goal into reality is no easy feat. Insurers manage assets in a highly customized way that reflects their unique needs and varying risk appetites. And they have to accurately track their progress.
As we look at the insurance industry’s investment management model, we find four important lessons that can be applied to the asset management profession.
1. Learn your client’s goals instead of selling products.
Insurance companies are largely defined by their liabilities, which are complex, long-term expected payouts. These liabilities stretch decades, and creating investment strategies for that length of time is not always second nature to asset managers. But the more insurance asset managers dig into each client’s business, the better they understand how distinctive their clients’ needs are and the more customized — and valued — the solutions they can deliver.
We think that’s a key reminder for all asset managers. Begin with the client’s needs, followed by a deep — and sometimes time-consuming — dive into their goals and appetite for risk, before presenting the best products and solutions.
Investment professionals have relatively generic products in their asset management toolbox, but how these products are evaluated and applied should be a customized process that tailors solutions to meet a client’s current needs and future objectives.
2. Consider the whole picture.
Insurers operate in a highly regulated environment. Add to that the complex liability profile, long-term business goals, capital structure, and accounting framework, and you have a dizzying array of factors to consider in building investment strategies. That’s why understanding the whole picture is critical in making seemingly basic, day-to-day, investment-related decisions.
By borrowing this approach and moving away from the obsession over quarterly returns, asset management firms and investment professionals will be better positioned to offer holistic solutions that reflect the whole picture. It also helps them create client-aligned strategies that stand the test of time. The long-horizon discussion is one of the industry’s greatest assets, don’t waste it.
3. Recognize the unique appetite for risk.
Each insurer’s tolerance for risk is based on its liability profile and the management team’s experience, among other factors. There is no one-size-fits-all risk tolerance level, and even companies with similar liability profiles may have different appetites.
But risk tolerance is a critical and defining factor in developing an appropriate investment strategy. The level of difficulty in ferreting this out varies by client.
Clients are usually most comfortable with a strategy that stays within a clearly defined set of risk parameters. However, it requires substantial effort to understand a client’s “real” tolerance for risk in various scenarios. The process is far more involved than simply determining whether a client is “comfortable with risk” or “risk averse.”
In the broader asset management industry, we need to see a greater use of diversified strategies that are driven by fundamentals and that accept only well-analyzed and well-priced risks. Rather than looking at risk in terms of market volatility or quarterly returns, it should be understood in relation to achieving long-term client objectives. Further, we must recognize that risk tolerance is ever-evolving, and clients should be encouraged to regularly re-examine their risk appetites.
4. Create custom benchmarks.
Each insurer’s unique liabilities, business concerns, and risk tolerance demand a custom strategy. Effectively monitoring a custom strategy requires a customized benchmark. Developing these benchmarks is a common skillset in the insurance asset management business as standard investment benchmarks don’t provide the necessary precision.
In the investment management space, however, all roads lead to pre-existing benchmarks. But these can be lazy, reflexive tools. They ignore individualized needs and objectives. Investment management professionals should consider the underlying investor as the primary benchmark. We know that beating a benchmark is gratifying, but supporting client success is the true North Star of the asset management industry.
Designing and delivering investment strategies customized to client needs offers several rewards. The greatest one for both managers and clients is building trust — and knowing that a focus on the client’s most important objectives will ultimately drive the value proposition.
The asset management industry is at an inflection point. Learning clients’ goals, considering the whole picture, understanding their risk profiles, and using their unique objectives to create custom benchmarks are far better uses of time than debating the merits of active vs. passive investing, quarterly returns, or any of the other issues that are secondary to helping secure a brighter future for our clients.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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