Q: Do you agree that investment management firms must imme-diately build size, distribution, and brand awareness if they are to compete in the next century?
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In a white paper released last month, Goldman, Sachs & Co. predicted tougher times ahead for asset management firms. It warned them to act now- while times are good-to prepare for what it says will be a much more challenging future.
The firm urged asset managers to build scale, distribution, and their brands to compete more effectively as a shift in demographics slows the flow of money into funds. It called on companies to develop their marketing savvy as consumers replace institutions as the driving force behind the business.
Coming at a time of healthy growth for asset management firms, Goldman's views have fueled a lively discussion in the business. Michael O'D. Moore asked three industry leaders whether they agreed with Goldman's advice.
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Size, distribution, and brand awareness are all factors in getting your shares into investors' hands, but I don't think in any respect they can replace the importance of performance. Performance is the most important ingredient to success.
I believe performance is a function of the individuals that you can attract and keep. Many smaller organizational structures are more attractive to individuals-particularly those who have been able to generate performance-than large institutions are. Goldman's report espouses size.
Perhaps I have a bias because I work for an independent money management firm. But I believe our success is predicated on our ability to attract and keep talent. That's why we want to stay independent.
There are advantages associated with scale. But I would argue that the ability to be nimble is going to be as important as being big.
I would refer you to a recent quote I read in Fortune magazine when Peter Drucker was talking to the chief executive officers of the Fortune 500. He said, in effect, that the Fortune 500 is history. It no longer has a rationale for existence largely due to the fact that scale was important in a manufacturing economy.
But in an economy driven by information and technology, the importance of size is being replaced by the importance of nimbleness. And I think in our industry that would be very applicable.
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For the most part we do agree with Goldman's conclusions. And I think the shift may be more gradual as these demographic changes take place.
If you break it down to three components-distribution, branding, and scale-from our perspective as the Fidelity company that serves financial institutions, distribution has always been and will continue to be important. I think the shift we've seen to the advice-driven components of the business is a key trend for asset management companies as they seek to expand and gain additional distribution.
We agree that branding is important. An interesting question to ask is: Do you want to build a mutual fund or an asset management brand or do you want to build a financial services brand?
I think building the financial services brand is more important today for the larger institutional institutions, including banks, than building a mutual fund brand.
Scale is important, but its level of importance depends on the strategy you choose to execute. If you choose to be a large financial services firm, I think scale does play an increasing level of importance for you. There are a number of reasons to build scale: for breadth of product line, for performance, or to gain access to new distribution channels.
Going forward, a catalyst for merging or acquiring or consolidation is the demographic shift that will see baby boomers retire and spend rather than save. Technology requirements, if you choose to compete as a large, broad product line financial services firm, will also be a catalyst.
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Yes, I do agree. And I believe that many large banks such as ourselves are favorably positioned, given that paradigm.
At Wells Fargo we manage in excess of $60 billion of assets for our clients, of which $25 billion is in the mutual fund sector. These clients have always viewed us as providing trusted and valued service and they are increasingly realizing that we can access multiple investment options for them.
So we think we are in a particularly good position to leverage this emerging trend as far as size, distribution, and brand awareness.
Finally, banks historically have not leveraged their brands for mutual funds and we think we have a hidden asset in leveraging our Wells Fargo brand by adding that name to the existing Stagecoach Funds name later this year.
We still think investment performance is a critical issue, but investment performance alone won't gather assets.
