Paper: Investors Need Better Balance of Investment/Business Sides, Extremes Are Worrisome
(March 5, 2012) — The notion that investment firms can use one of two extreme approaches—asset gatherer or investor—to build and sustain a business is both unrealistic and overly simplistic, according to Janie Kass of Margolis Advisory Group.
In a conversation with the author, Kass told aiCIO that the paper’s key takeaway is that investors must do a better job balancing the investing side and the business side of their work. “For too long in our business there was a myth that either your firm was investment driven — perceived as good — or an asset gatherer — perceived as bad,” Kass said. Investment-driven firms are perceived as being driven by performance, which is beneficial for clients, while asset gatherers are perceived as being solely concerned with gathering assets for the firm to the detriment of their clients and their returns, she added.
“Individually these approaches cannot facilitate long-term success, as both asset growth and solid investment performance are necessary for initial growth, client retention and sustained vibrancy. That is why firms that adopt the blended ‘asset grower’ mentality are best positioned for lasting success,” Kass writes in a recent paper titled “Asset Grower: The Ideal Blend of Asset Gatherer and Investor”.
According to Kass, either extreme is unwise. “You need to balance the investment needs with the business side. That’s the key. The client is obviously the most important constituency because without them the firm doesn’t exist.”
In an aiCIO video in September, Charles Ellis, an author and consultant to large institutional investors in the US and Asia, voiced another critical perspective of the investment management industry.
“As a profession, let us correct our two errors of commission—defining our mission as ‘beating the benchmark’ and letting the short-run economics of our business dominate the long-term values of our profession. If we correct our error of omission by reaffirming investment counseling in our client relationships—as we certainly could—we and our clients will both benefit in a classic win-win situation.”
Ellis concluded that as investment management organizations have been growing, it is not surprising that business managers have increasingly displaced investment professionals in senior leadership positions or that business disciplines have increasingly dominated the old professional disciplines. “Business disciplines focus the attention of those with strong career ambitions on increasing profits, which is best achieved by increased ‘asset gathering’—even though investment professionals know that expanding assets usually works against investment performance,” he wrote in a paper.
Thus, according to both Ellis and Kass, for businesses both large and small, it is important to avoid the tendency of focusing purely on business profits at the expense of clients’ needs. “It’s imperative to balance asset gathering and investment needs for long-term success,” Kass said.