Some large investment management firms, including most run by banks, are refocusing on individual products instead of relationships to generate assets in a difficult stretch of the economic cycle.
At least one in three investment firms are reengineering their business models, because they've found breaking down "silos" has been too expensive and has not helped them increase assets, according to a global study of investment management firms released Tuesday by KPMG LLC.
Medium and large firms are creating a "village of boutiques" that specialize in specific products and services, the study said.
John Capone, a partner with KPMG's investment management and funds practice, said that to do well at any big money manager, teams have to be isolated in these boutiques.
"Asset managers have to find out what they do well and adopt a model that will be more successful," Mr. Capone said. "Firms then have to find the strong-performing groups and develop that expertise."
By doing so, "either you have a group that can do things well, or you shut it down," he said.
Elizabeth Rowe, an analyst with Find/SVP Inc. in New York, said she also believes investment managers are abandoning their dreams of relationship-based advising and are now building smaller practices that are regionally or specialty-based.
"Firms are moving back to the entrepreneur-based organizational structure that worked in the 1980s," she said. "An office of five to 10 people in St. Louis allows individuals to have autonomy and find success through building and creating boutique services with the support of a large firm behind them."
Large money managers have realized that the relationship-based approach popularized in the late 1990s is ineffective, Ms. Rowe said.
"I think a lot of people learned delightful phrases in business school that are very difficult to make into reality," she said. "All that resulted in the late 1990s and early 2000s was a culture of people slogging through airports. This relationship culture broke people, and money managers never achieved optimum results."
KPMG surveyed 300 fund managers in 29 countries. Mr. Capone said the product-focused business model is designed to help regain client trust, improve performance, develop a strong investment culture, and reduce overhead.
"Look at this organizationally," he said. "We have been very flat and department-oriented. Now we are looking to create boutiques. Instead of pyramids, you break it down into effective working groups."
Charles "Chip" Roame, the managing principal at Tiburon Strategic Advisors, a California analytical firm, agreed that investment managers have to be willing to find a strategy that will enable them to go with their strengths.
"Firms that focus on target markets have the best chance to succeed," he said. "It isn't a matter of launching new things," because firms already have most of the products that need to be offered.
Some analysts disagreed with the study's findings. They said that "silo" has become a four-letter word for most investment managers over the past five years, and that most still shy away from that model.
Burton Greenwald, a Philadelphia investment analyst, said sending customers from one product department to another at a large investment firm can destroy any chance for cross-selling.
"Investment managers want to develop relationships. They don't just want to push products," Mr. Greenwald said. "Most firms, especially banks, spent a lot of time and money creating an organization that relies on an adviser working with clients, developing a relationship and selling products over a lifetime."
Geoffrey Bobroff, an East Greenwich, R.I., analyst, said that even though the relationship approach has not worked yet, going back to a product-focused strategy is not the answer.
"Building silos and working in silos didn't work," he said. "Working in silos meant a culture of people that didn't talk to each other, and that was a disaster."
But Mr. Capone said investment firms are considering a product-focused strategy as a last-ditch alternative to increase assets so they won't have to cut any more costs.
According to the study, there have been significant cuts globally in the past three years. The average U.S. firm has cut its costs by 20%, while the average European firm has cut 18%, and the average Asia-Pacific firm by 12%.
"They can always cut costs, but most respondents feel that they have done that already," Mr. Capone said. "Now they are settling in and trying to find a way to be more effective with the products that work.
"I was really struck by the optimism" about their ability to improve efficiency, he said. "Investment firms think the market is going in the right direction. It is optimism, but it is still cautious optimism. Firms know that if things don't turn around they will cut costs. They will cut staff."
