Whose Client is it Anyway?

 

Larry Fink is advising investors in general and his clients in particular to own 100% equities. Clearly the man who was instrumental in building a 3.3 trillion dollar asset manager on the foundation of bonds has become a stock guy.  Whether or not this radical asset shift is sensible is certainly debatable. But an equally interesting question  for many of us thinking through the quickly evolving nature of asset management and distribution is:

“who, exactly, are Larry’s clients?”

and, what does he know about asset allocation? Is Jan Investor, ABC Pension Fund and XYZ Foundation BlackRock’s client or that of the investment intermediary who, so graciously, made the allocation to BlackRock’s investment strategy?

Certainly the intermediaries through whom  BlackRock and every other asset manager around the globe have gathered assets (investment consultants, private banks, broker-dealers and the like) see the situation differently. They are not in a position to take Larry’s advice and move their clients into 100% equities. In fact, they are not interested in BlackRock’s  (or any other manager for that matter) opinions on asset allocation at all. In fact, they are the ones giving asset allocation advice and getting paid for it. Without the advice, what are they good for? Are they simply an introduction service for fee-hungry asset managers with 40% (+/-) margins?  How are they going to earn their fees and maintain themselves in the relationship? Ah, there’s the rub.

These intermediaries, at least in how they are used to operating, do not want Larry’s advice and asset allocation acumen – they want him to ensure that the fixed income products outperform their peers and benchmarks, that the hedge funds produce absolute returns, that the style of the equity products don’t drift…get my drift? Stay in the box Larry, we’ll let you know when we need you.

The dynamics between asset managers and the intermediaries who have been standing between them and the end-clients (read: the ‘client’ with the money) are not what they were twenty years ago. The intermediary is (was) in the driver’s seat, making asset allocation decisions, hiring and firing managers whose responsibility was narrowly defined – stick to the asset class/style for which you were hired and leave the asset allocation to us.

We have been watching this unfold for years but it has now reached the momentum point ™ (sorry Malcolm). In recent weeks, I have had repeated conversations with asset managers who tell stories about seeing the institutional consultants who once included them in searches showing up at finals presentations as competitors offering ‘implemented’ multi-asset solutions themselves. Well, well.

Ok, if no one else will say it, I will. You guys aren’t friends, really never have been. Stop pretending and just put the gloves on.  The disintermediation battle is on.

Though the frictions have clearly been developing (albeit relatively slowly), few in the industry, on either side of the trade, were terribly concerned about the evolution in the relationship between ‘manufacturing’ and ‘distribution’. Everyone was making money, markets were headed up, the asset allocation models, if not working as hoped, were at least not so apparently broken.

For many of the traditional asset managers, there were other things to worry about – being crushed by the ETFs charging from the left or picked off by the hedgies hiding in the shadows to the right. Insofar as distribution relationships go, rising tides…

But now the tides have receded. Margins are compressed. Regulation is overbearing. Clients are dissatisfied and are not as sympathetic to the manager/consultant agency problem as they once were.  Everyone is seeking a closer relationship with ‘the’ client and migrating to where the fees are. Each is seeking to control the relationship (and stay in the game). If I am being held as fiduciary, I want to get paid! It turns out (right after client-first) we all want the same thing.

Of course, this is not an entirely new situation.  Arguably it is a return to the state of the industry before there was a distinction between asset allocation and stock selection. To be an asset manager was (is) to not only buy stocks and bonds but to decide when to own one as opposed to the other. That was in the days when bank trust departments were at their peak of power…alas.

And who threw the first punch? Was it asset managers encroaching on the world of the adviser/consultant through developing products incorporating asset allocation and ‘solutions’ or vice versa with ‘implemented’ consulting? Doesn’t really matter – blood has been spilled.

While this topic manifests itself in multiple ways around the world throughout client segments and geographies, perhaps the most visible implications are the growth  in ‘multi-asset/multi-manager’ on the part of what have been traditional asset managers and ‘implemented consulting’ and ‘solutions’ on the part of those who, in large part, have simply been the buyer of individual asset management products. Outsourced CIO anyone?

This is a game changer – it will turn the industry on its head.  One must hope that the arrangement best suited to meet the needs of the end-clients will ultimately win out. What that model(s) looks like is being defined today.

There has been plenty of double counting  in our industry but for how much longer? At some point we will need to answer the question:  “Whose client is it anyway?”