Home ListingSeptember 30, 2013

Boutiques Struggle under Regulatory Pressures

<em>Will regulation leave investors with only the big boys to choose from?</em>

Reported by Featured Author

(September 30, 2013) — Small and boutique asset managers are facing increasingly large regulatory hurdles that could force many of them out of the game, research has found.

More than half the respondents to a survey by Tabb Group and Sungard said encroaching “institutionalisation” was the greatest barrier to entry in the fund management industry. The 51% agreement on this issue dislodged last year’s highest-cited obstacle of cost, which attracted just 44% of the top votes as the main problem faced by this group.

“Growing operational and regulatory minimum requirements such as AIFMD, Dodd-Frank, and UCITS IV/V are leaving many boutique asset management firms unable to take part in the mandate process,” said Adam Sussman, partner and director of research at TABB Group. “Scale is the feature that boutiques believe they lack, and technology and better operational efficiency is the key to achieving increased scalability.”

That these firms feel unable to compete due to heightened regulatory hurdles is somewhat ironic, according to Ed Lopez, executive vice president at SunGard’s asset management business.

“The Catch-22 here is that boutiques pose less systemic risk than large institutional managers, yet due to the high cost of compliance and a proliferation of regulation they are the ones under greatest threat,” said Lopez. “So while the ‘too big to fail’ firms continue to raise assets, boutiques run the risk of being ‘too small to succeed’. They need to be more focused and self-aware as they navigate their way through this regulatory uncertainty.”

Perhaps unsurprisingly, the SunGard executive added that these smaller firms should invest in technology, improve their operational efficiency, and look seriously at outsourcing any function that does not relate to their core competency of investing – especially those related to compliance and reporting.

In December last year, SunGard reported that the majority of asset managers saw their industry splitting into two camps: massive, full-service firms and specialized boutique shops. Some 70% of 126 surveyed managers believe in the “Big Squeeze” phenomenon—middle-tier players losing ground while the major firms grow and niche boutiques proliferate.