The Thing Investors Value Most in Manager Selection

Track records matter less than a manager’s ability to earn an investor’s trust, according to a new study.

Illustration by II

Illustration by II

Even the best-performing asset managers will struggle to win investors’ capital if they don’t first win their trust.

The top five factors driving an investor’s decision to hire an asset manager all come down to trust, according to an upcoming white paper from Chestnut Advisory Group, a business advisor to asset managers.

“Capital flows are all about people,” argued Amanda Tepper, founder and CEO of Chestnut. “Look at Vanguard. How did they get so large? Now indexing is received wisdom, but it was heresy at the start,” added Tepper, speaking the day after the death of Vanguard founder Jack Bogle. “Bogle and his successors repeated the same message for 40 plus years.”

According to Chestnut, the top consideration for investors when choosing an asset manager is whether they have a strong understanding of the investment process, followed by the manager’s credibility and the investor’s understanding of the firm’s risk management. The fourth and fifth most important factors were clear and consistent communications and confidence in the manager’s business structure and incentives.

“You need to convince people why they should give you money and not somebody else,” Tepper said. “They are not buying a risk-return stream, they are entering into a relationship with you.”


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Performance, of course, still matters. But it’s not the number one reason why investors hire or fire managers, according to Chestnut. In fact, Tepper said managers who establish trust are able to hold on to client money far longer than peers during inevitable performance blips.

“A lot of the proof of what is a sustainable asset management company is that they can hold on to their assets the longest during that period of underperformance,” she said. “Highly trusted managers get six to 12 months more runway.”

Trust will mean different things to different client segments. Some clients, for instance, will trust certain incentive programs, such as performance fees, while others will prefer different fee structures. But according to Chestnut, trust generally comes down to a mixture of competence and warmth.

“The most admired asset managers are perceived as extremely warm and competent,” the firm stated in the report. “We often refer to Warren Buffet as the classic embodiment of asset manager strength across these two key traits.”

Tepper said many asset managers focus almost religiously on projecting competence. But without warmth, these managers may be viewed as “ruthlessly efficient and machines,” much like lawyers, according to the report. Even asset management firms with a great track record can damage trust through poor communication with investors. These firms can attract assets in the short run, but they’re not profitable over the long term, Chestnut said.

“At worst, investors fear that extremely competent managers may use their skills to benefit themselves at the expense of clients,” according to the report. As an example, Tepper pointed to talented managers who keep top products open long after they reach capacity, invariably hurting returns over the long-term. She said managers that clearly communicate the criteria for closing funds and then stick to those criteria can better engender client trust.

But once trust is lost, it’s hard to regain it – a phenomenon Tepper attributed to the behavioral finance theory that the pain of a loss is far worse than the joy of a gain.

“Think of Yelp,” she said. “A negative review can close a restaurant. But a diner who says she had a nice dinner? That’s a yawn.”