Investment Management 101

One of the best things about working for IBM is the variety of work and the opportunity to take on new challenges without changing employer. In my current role, I am a member of a very specialist unit in IBM – often described by our UK CEO as the tip of an arrow spearheading an industry. Individuals in this team have deep industry expertise. Some colleagues have even spent years working in a specific industry before joining IBM. So, no pressure!

I am tasked to lead our engagements in the Investment Management industry; more specifically the asset and wealth management clients. The only challenge is that I am not an investment guy! So I had to race up the learning curve quickly. I began by searching answers to the following questions:

1. What is the purpose of the industry? Who does it serve and where does it fit in the wider financial sector?

2. What are the front/ middle/ back office functions in a typical organisation?

3. Who are the key actors in the industry?

4. What are the hot topics (innovation/ challenges) in the industry?

My hope is that by finding answers to the above questions, I will, hopefully, have further curious questions (I don’t even know what I don’t know yet) and help me engage with my clients better and have a rounded perspective.

Industry Overview

I define the investment management industry’s purpose as – To understand and realise investment objectives of an asset owner over a defined term”. Interestingly, when I explored academic literature in this field, it is broadly categorised under ‘Behavioural Finance’ which suggests that an asset owner/ investor employ an asset manager because of their psychological belief that they cannot achieve the investment objectives themselves.

Asset Managers, fund managers, wealth managers are specific job functions in the industry; just like a software engineer, software architect and design engineers are in the IT industry. They perform specific functions and provide a range of services to their clients. I see the supply chain as follows:

Figure 1 – Supply chain in the industry

Figure 1 – Supply chain in the industry

An investor/ asset owner is an entity that is ultimately the legal owner of the asset. For example, a University owns an endowment; Richard Branson owns cash in his bank accounts and properties around the world. Types of institutional investors are:

– Pension funds

– Insurance companies

– Sovereign wealth funds

– Charities Foundations

– University Endowments

– Banks

Although this may vary between geography and size of a wealth management organisation, the categorisation of individual customer is as follows:

– Affluent (Assets between $100K – $1M)

– High Net Worth (assets between $1 – $10M)

– Ultra-High Net Worth (assets above $10M)

An asset owner employs one or more asset/ wealth manager for their investment skills. Whilst the role of an asset and wealth manager is broadly the same (i.e. achieve investment goals), they have different scales and cater for different client needs. An asset manager usually has institutional investors such as pension funds, banks, insurance companies whereas a wealth manager typically caters for the retail market i.e. individuals that are affluent, high net worth and ultra-high net worth. A wealth manager provides bespoke personalised services to individuals for all of their wealth that may include cash, properties, art collection, car collection etc.

Finally, a fund manager provides their services to the asset and wealth managers in form of financial instruments that they believe will outperform market volatilities.

Some asset owners (generally institutional investors) also employs an intermediary. The objective of an intermediary is to help an asset owner recruit a suitable asset manager and periodically perform objective assessment of the services provided by the asset manager. They may also provide additional functions such as compliance reporting, reconciliation, asset servicing etc.

Figure 2 - Intermediary

Figure 2 – Role of an intermediary

Fundamental principle

An asset/ wealth manager acts on behalf of an investor (asset owner) and must always act in the interest of the investor with a view to fulfilling the asset owner’s investment objectives. It has a fiduciary duty and its loyalty should lie with the investor. This investment management industry is unique that although it can potentially control the fate of assets of enormous proportions, they are not their assets and therefore are not shown on the balance sheet of an asset/ wealth manager. They must simply act as an agent. This has profound implications around regulation and ethics which I will discuss in future blogs.

The diagram below illustrates how I see the investment management industry fit in the wider picture. I suspect there are numerous other ways this could be drawn. My rationale was that the investment management industry is ultimately creating products for the asset and wealth managers.

Industry fit in the sector

Industry fit in the financial services sector

Figure 3 – Industry fit in the financial services sector

The asset and wealth managers are known as the “buy side” and the investment banking firms are known as the “sell side”.

The diagram below is my mental map of the business functions and external actors. Some functions such as fund administration, custodian services, payment processing, trade execution etc. may be outsourced.

business functions of an asset and wealth manager

Figure 4 – Map of key front/ middle and back office functions

I will most likely refer to this picture in my following blogs when I discuss specific business functions and how to re-imagine their functions to transform your business. In the meantime, please print this on an A4 or A3 sheet and pin it on your wall 🙂


Focusing on the challenges, you can pick up any major publication and these topics are consistently making headlines:

1. “Trust” and when I break this down into sizeable chunks – some are really sensitive topics. Sensitive for the regulator, government and also the investors. Lack of openness and clarity around fee, charges and demonstrating zero conflict of interest. This issue has reached highest levels in Government as well. For example – Lord German’s proposal in the UK to ban NDAs and a couple of weeks ago, the US president Barack Obama said, “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first. You can’t have a conflict of interest.” And, he has put forward a proposal to protect investors.

2. Gender gap that is also reflected in the pay. Though you could argue that this is an HR/ internal issue, there is some evidence to suggest that female asset managers are better performers than their male counterparts. Although this could be because there so few female asset managers that only the best remain in the industry?

3. Discussion between Active Vs Passive management and that only a fraction of active managers actually meet their performance objectives after fees and charges. This is self-evident as passive fund allocation strategies are on the rise.

4. Linked with the above, is the issue around performance and efficiency of asset managers i.e. determining if they are being successful due to skill or luck?

5. There are other issues that are not high on the visibility radar yet but will become important, especially for institutional investor are

♦ Expectation of responsible investing especially in case of discretionary investments.

♦ Millennials and do wealth managers know how to engage with them? What happens after the millennials?

6. This debate would not be complete if I did not mention regulation. I think there is a triangle of Regulation à customer expectation à Technology innovation. The challenge for the asset and wealth managers is how to maximise innovation through technology so they can meet the growing demands of their clients and cost of meeting regulatory demands. Regulatory changes are retrospective and therefore if you are trying to meet regulatory demands then you are probably in catch up mode.

Call to Action:

♦ Start by truly understanding your customer. Predict their needs before they tell you their needs. Draw a parallel from the retail sector who have had to transform their businesses to remain on the high street. Can you surprise and delight clients? What value can you deliver to your clients beyond just asset selection? Create a culture in your organisation that your team is willing to do the right thing for the client even if it is not the right thing for your business. Perhaps this will be the topic of my next blog and I can share my thoughts on how to put customers at the centre of your universe.

♦ Setup a small innovation team that focuses on solving day-to-day business challenges in a different way – not a cliché – a necessity in my view. Give them the tools, funding and the freedom to be creative. Encourage them to look beyond your own industry to look for inspiration or, perhaps even collaboration. Most thought leaders are arguing that the innovation will come from outside the industry. Form those partnerships.

♦ And finally, if you were to start all over again, what will you do? How will you engage with your clients and empower your employees? What platforms will you create? Can you re-imagine your entire business? Run a small proof of concept over a short period.