In the second episode of City Hive’s series with Asset TV, panellists explore the regulatory incentives and requirement to ask questions around culture, and what investors need to consider when fund managers leave to found their own firms

City Hive’s co-CEO Bev Shah joined an Asset TV panel to discuss how funds are being run with consumers’ best interests at heart, what to consider when fund managers leave to set up their own boutique firms, and how remuneration maybe incentivising in the wrong way.

In the discussion titled Navigating investment boutiques, fund performance and consumer interests, hosted by Asset TV’s Mark Colegate, Bev discussed how board members need to be the voice the stakeholder and hold firms accountable - when decisions are being made are they made with the customer at the heart of it?

The panel, which included Andrew Summers, CIO at Omnis Investments, and Mona Christensen, head of client outcomes at Hargreaves Lansdown, also discussed what clients are looking for in terms of trusting their platforms and the manufacturers of investment products, safeguarding vulnerable clients and ensuring all clients have access to the information they need to build their pensions and savings.

From fund manager to founder

They noted the trend for well-known managers to leave and set up their own boutiques and what fund selectors need to take into account - for both the firm they are leaving and the new firm they are setting up - and what does that says about a company’s culture.

Importantly, Andrew said he will want to know how the fund manager setting up their own new company will be challenged and held accountable.

“No matter what you put on paper in terms of what the corporate structure looks like in reality, it's quite likely the investment manager will have a huge amount of control and sway over the entire organisation.

“That is not always typically an optimal way of running a fund management business,” he said.

Bev highlighted fund managers will need to consider many other things than just running money when setting up their own business. “There is probably a lot that hasn’t been thought about - a business plan, regulation - things happening behind the scenes that a fund manager in a large organisation perhaps doesn’t think about as much.”

Unitholders tempted to follow the fund manager would need to consider if moving client money would be better and less risky for them while learning how to run a new business.

“I’m not saying they can’t do it but it is a challenge and it’s not an easy one,” Bev added.

The panel discussed how people departing large organisations to set up smaller firms is healthy for the investment industry as it creates new players and competition. But for fund selectors they need to consider if the fund manager has understood the challenges of launching a new business and thought about ways to tackle them.

“The good ones will learn from the mistakes of other boutiques setting up,” noted Mona.

“When we see a due diligence questionnaire come back with gaps in them, we have conversations. We don't discount them but say, this here is a gap for you and we would like to see that improve over time, here is a way we can do that with you.

“Boutiques telling us they don't have all the answers are much more trustworthy than those telling us that they have.”

Performance or outcome incentives?

The panel also explored remuneration for investment managers and whether there is a ‘wrong’ kind ie are fund managers being rewarded for adherence with the underlying philosophy of a fund or achieving the targeted outcomes, or are they being rewarded based on the headline performance figures?

Mona pointed out regulation requires fund manufacturers to explain how a fund represents value, either through Consumer Duty or other regulations such as Assessments of Value.

“We now have a regulatory incentive and requirement to ask those questions as well, which makes it a lot more easier to have that conversation,” she said.

Ultimately, the panel concluded, the final safety net is your culture of your organisation.

“You can have whatever policies, processes, procedures, organisations and committees in place that you want that try to provide a framework for behaviour and actions. That's all very important but what will really save you, especially when times are hard, is your culture, the way that you behave, and whether the atmosphere holds right people are properly accountable,” said Andrew.

“You need to have the right level of challenge, and the right level of openness and transparency because processes and policies are not fail-proof.”

He added: “Typically great people want to work with other great people and in a culture that is supportive, challenging, motivating, and that incentivises everyone to do the right thing for the end investor. Where they are willing to be held accountable, where they are willing to be open and transparent about what they do and are not defensive or arrogant, or impervious to suggestions and improvements.

“The hard work of building out that culture is fundamentally what enables you.”

This is vital to the future of our industry, Bev remarked.

“Ultimately for clients, it's important the ecosystem of asset management businesses stay alive, that they still keep growing. We don’t want to see businesses disappear, we want to see the ecosystem of the industry thrive. Culture all feeds into that.”