The Things We Think and Do Not Say

There’s a cruel wind blowing through the asset management business. We all feel it, and if we don’t, perhaps we’ve forgotten how to feel.

Hedge funds are struggling. Private equity firms are paying fines for cheating their clients. Research shows that active managers, in general, are not any better than an index fund. The truth is that most asset managers create nothing. They shove digits around. The entire business has become a tap dance meant to convince asset owners to part with their money. Is it any wonder that the future of asset management is increasingly seen as “grim”?

Looking back at my career, I’ve spent it helping asset owners to professionalize. I’ve walked countless pension fund hallways and earned elite status flying to foreign capitals to meet with sovereign funds. It’s been hard work, but I’m happy with what we’ve accomplished. I’ve seen an enormous amount of positive change over that time and expect to see plenty more. But what’s always been missing was a desire on the part of asset managers to change. That’s now changing.

For the first time, asset managers are approaching me with some pretty heavy, existential questions. They seem genuinely worried that real disruption is coming, and they are asking for help. I’ve given five talks in the past few months to groups of asset managers on how they can change ­— how they can better position themselves to serve the needs of asset owners. Until this year I’d never given this kind of speech; I guess 40 percent profit margins gave managers the luxury of being able to ignore the ground shifting under them, for a while.

But I’m happy to help. I’m happy to advise asset managers on how they can be better partners to their pension fund clients. And, as I sit here in the darkness of this trans-Pacific flight from Sydney to Los Angeles, the advice I have is rather obvious: fewer and more meaningful client relationships; less tap-dancing; more truth.

To help crystallize these ideas, I reached out to ten of my friends who hold or have held senior positions within pension and sovereign funds and asked them, “What advice would you give to managers wondering about their future? What are the things you think but do not say to your managers?” To my surprise, every single one of my e-mails was answered with useful insights and suggestions for managers looking to raise their game. Here are six of the best:

• Managers should explain their performance in ways that offer clear attribution and understanding: “We need to understand you in good times and bad, so we can see you through the bad times and let it ride in the good times.”

• Managers should charge less. Fees of 50 basis points on 7 percent returns look different from 50 basis points on 4 percent. Also, incentive structures are important drivers of alignment: “Without true fee and cost transparency, it’s hard to assess whether there is true alignment of interests. We need alignment to trust the motives behind managers’ advice.”

• The more a manager can help a client — even in ways outside their core mandate — the better. Underresourced pension funds would like to see managers as an extension of their team. Foreign sovereign funds would like managers to provide introductions to their local networks. Managers should share their research and insights. “This is how you build sticky, meaningful relationships.”

• In a similar vein, managers have to be completely transparent about their positions and approaches. As one CIO told me, “Remember that our job is to deliver outperformance at a total portfolio level. That means running risk models that can’t function without all the detail on what our managers are holding. Increasingly, we’re going to demand the data, and if we don’t get it, we won’t do the fund.”

• Managers should treat limited partners as life partners. One guy told me, “I don’t want to hire a manager that I wouldn’t go on a long hike with. I mean it.” Another emphasized: “Good or bad, show up.” Yet another: “Don’t send investor relations teams; get on a plane and spend time listening to my needs and explaining your world views.” Everybody I’ve spoken to underscores this point: This is about building lasting and trusting relationships.

• Managers should not embarrass themselves. One fund investor remarked, “We like our asset managers not to have any ongoing discussions with the criminal division of the U.S. Department of Justice.” He was not joking.

I recognize that asset owners still have a long way to go in order to implement this “relationship model” with their managers. They need better governance models that can react quickly, take contrarian and long-term positions and allow employees to spend time with asset managers. The fact is that most asset owners are purposely designed to minimize the chance that employees develop a personal relationship with their manager.

Don’t let that stop you from developing personal relationships.

Managers: Be honest with yourselves. Be honest with your clients. Forget the tap dance. Focus. It may mean less money. It may mean more attention for them. As Dicky Fox once said, the secret to this job is personal relationships.

By now, you may realize I’m doing a sort of remix here of the manifesto on sports management from Jerry Maguire. I’ve done this mostly because Cameron Crowe is a better writer than I am, and I genuinely think you all should read his document (doing a “replace all” for “sports” to “asset” throughout). But I also did this quasi-remix because I think the asset management industry is ripe for some Jerry Maguire moments in which a new generation of professionals start to call things out in ways they never did before. I expect we’ll see some more manifestos in the years ahead, and I think that’s exciting.

I’d like to see some righteous individuals, hell-bent on caring for the clients in new and thoughtful ways, leave their mainstream finance jobs and, in a final act of defiance, grab their goldfish and call out to the entire office: “Who’s coming with me?”