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Serious financial crises always leave lasting footprints. The horror show unleashed on Weimar in the 1920s, for example, still lingers in the minds, and investing habits, of Germans not then born. Compared with Weimar, the crisis that visited itself on US and global markets in 2008 and beyond was a mere squall. But its footprints remain.
The most lasting of those, I would argue, is a loss of trust. But asset managers, notwithstanding the huge role they have come to play in global capital flows, have managed to dodge this bullet. One can rightly summon up indignation at, say, the capital markets desk at Goldman Sachs. “Long-term greedy” was what executives at that storied firm liked to call themselves some decades ago, and all we really learned from the most recent financial crisis was that “short-term greedy” was equally applicable. But no fingers were pointed at BlackRock or PIMCO or Fidelity: These remain institutions that, rightly, retain their customers’ trust. Even in institutions tarnished by brushes with scandal, many asset management divisions remain highly regarded—JP Morgan’s investment management business being a case in point.
Much of this flows from a natural alignment of interest, which is an enduring feature of the institutional asset management space. This alignment is less clear in the hedge fund arena: There is some confluence of interest, but hedge fund principals ultimately have more upside and less downside than their institutional clients. Yet the alleged misdeeds of, say, Steven Cohen’s SAC Capital are simply not relevant to the asset management industry—for, notwithstanding the best efforts of its prime brokers, very few institutional investors were persuaded to place any trust in SAC. It is hard to lose trust when you never had it in the first place. Madoff, too, was a sideshow in this regard: The vast majority of investors who learned that the investment savant to whom they had entrusted their savings was a thief were high-net-worth investors and family offices.
But if loss of trust has not radically impacted the asset management industry, that is a long way from saying the financial crises of the recent past have not transformed it. What we have learned this last decade is that the Great Game of Managing Money with a view to outperforming all and sundry benchmarks is something of a fool’s game. Certainly, the “profit center” that led corporations to happily bet on the God-given truth that alpha—or, for that matter, positive beta—can be reliably extracted in the equity markets has now been consigned to history’s trash can. Most asset owners have liabilities that have to be paid: We now live in a world where common sense and regulation make it clear that the crux of the issue is meeting those liabilities in as risk-conscious a manner as is humanly possible. Not surprisingly, it took a crisis to get us there.
It also took a crisis to get us to a very different defined contribution (DC) construct. For a hallucinatory decade or two, we lived in a fairyland where Americans, putting aside monies for their retirement, were asked to pick from menus of mutual funds. It was the age of empowerment—no bad thing, that—and the age of bull markets, so all went well for a while. Then a series of financial crises overturned capital market expectations, and top-heavy equity portfolios demonstrated, as ever, that with return comes risk. What we can take pride in as an industry—and full credit to regulators in this regard—is how quickly the DC marketplace has reinvented itself. From a free-for-all mutual fund-picking frenzy, we now have evolved to intelligent investment solutions—many, and, perhaps soon, most, participants are defaulted into asset allocated funds that prepackage various investment sleeves into a unitary whole. Target-date funds are far and away the most common of these asset allocated funds, and they come in all shapes and flavors: At the sophisticated plans, they can be entirely customized, and into the mix go alternatives of various stripes, beta sleeves, long-duration fixed income, and so on, with a separate glide path and a commitment to a completely open investment architecture. That is perhaps a goal to aim at, but even a small plan with a proprietary mutual fund target-date solution is a significant step-up from the construct that preceded it.
Crises, it should be clear, can be useful prompts from the tried and trued, the stodgy, the overused, the easy path. Crises are when better asset managers should come into their own. Crises should prompt re-evaluation and rethinking. There are plenty of scapegoats to be found, and perhaps we can even make an example of some of them. Better yet, a crisis can speed the path to better investment solutions. Indeed, it has done exactly that in both the defined benefit and defined contribution arenas.
Charlie Ruffel—founder of aiCIO and Asset International’s other media brands—is a global authority on retirement, asset management, alternative investments, and securities services issues. He is now Managing Partner at Kudu Advisors, which provides M&A and strategic advisory services to institutional asset management and global asset servicing businesses.