Building an Asset Management Business : Doing things that do not scale

At Itus, our core activity revolves around studying business models and looking at understanding why certain kinds of businesses scale and delight their customers during this journey. It’s only appropriate that we use the same lens for studying the asset management business too, this being what Itus as a firm is building out.

While looking at studying scale and business models, I often go back to the article written by Paul Graham about startups and scale in 2013, where he was talking about doing things as a company that does not scale. While at first, it does seem extremely counterintuitive, it gives every founder something interesting to think about – when do founders need to think about inorganic growth? What should the focus of the founding team till then? (Read here for the original article)

An asset management business is an extremely interesting business model as funds can scale with a centrally focussed team. The world has seen extremely successful fund management teams managing capitals in excess of $5bn with the investment decision being centralized and small.

Some of the best-run asset management businesses built (and I define best – run as those who have managed money over 10+years with a consistent track record) have done so by onboarding clients manually, in-house. The most common unscalable thing promoter run asset management firms have to do in the start is to bring clients on board manually. While many firms, look at partnering with distributors from the very start, this never is a ‘smart’ way to go about the business.

There are two reasons asset management companies resist going out and onboard clients individually. One is a combination of shyness and the fact that its extremely hard, they’d rather think that their time is better spent on only doing research and investing, rather than to approach clients and be rejected by them. But, for a company to succeed, atleast one founder has to spend time on marketing and client acquisition – it’s really important for this to happen to understand: a) having your pulse close to the clients and managing their emotions b) the asset management business is around managing money (inherently returns and risk) and clearly communicating your philosophy. Both have to go hand in hand.

The other reason most companies choose the path of working with every distributor rather than meet clients themselves is that the absolute number in the latter seems small at first. The same fund manager who preaches compounding for returns forgets the same concept in terms of client acquisitions – some of the most successful asset management firms have scaled organically and through word of mouth. At a certain scale, they choose their partners carefully as they look to grow the AUM over time. Scaling AUM too fast in this business has had very poor experiences for the investors in most cases.

While the mutual fund business has been focussed on retail, with a one size fit all model, many of the other structures (like PMS and AIF) were created to bring in the ability to customise strategies and experiences for the investor (to ensure a more personalised offering). Moving the alternate funds closer to Mutual funds, defeats the very essence of running the fund (at least from the investors’ perspective).

Delight

As an asset management company, you have a fiduciary responsibility to every client whose money you manage. It is imperative one takes extraordinary measures not just to acquire users, but also to make them happy. Your first users should feel that signing up with you was one of the best choices they ever made. And you in turn should be racking your brains to think of new ways to delight them.

Most fund managers believe that their job is managing money and to generate returns. While that is at the very core of what is expected, one of the key aspects of being a fund manager is also customer service which is not something of a focus area for most.

Another reason founders don’t focus enough on individual customers is that they worry it won’t scale. It’s important for the asset management firms to think like a larval startup, where they need to obsess about their customers. Sam Walton always was vocal about this to his staff when communicating about the value of the customer – his operating philosophy when translated into the asset management industry would go as follows: “ There is only one boss. The customer. And he can fire everybody in the company from the founders all the way down, simply by investing his money somewhere else.”

It’s important to make the ‘delight’ of the customers happen. And incidentally, when it does, you’ll find that delighting customers scales better than you expected. Partly because you can usually find ways to make anything scale more than you would have predicted, and partly because delighting customers will by then have permeated your culture.

The biggest thing preventing asset management founders from realizing how attentive they could be to their customers is they’ve never experienced this themselves. The standards for customer service have been set by companies that are large and they never get a hand-written thank you note for being a customer of the firm. However, that’s precisely one of the reasons one needs to invest time and effort into this.

Sometimes the right unscalable thing to do is to focus on a narrow market in terms of where your customers are. It’s analogous to keeping a fire contained at first to get it to be really hot before adding more logs. You don’t need to create a large one from the get-go – which is what most asset management companies strive to do. It goes back to the origins of a few successful asset management companies where the founders are fully invested into their funds, they would not manage their money any differently from they manage their clients.

Asset management businesses have been in existence for more than 50 years now, more specifically in the US and for the last 30 years in India. However, there are very few that build a sustainable business focussed on the customer, and this again goes back to the origins of businesses wanting to scale and grow AUM quick. A focus on scale too early in the journey and lack of a direct engagement with the customer results in a poor taste for most investors in the industry.

In the best case, both components of the vector contribute to your company’s DNA: the unscalable things you have to do to get started are not merely a necessary evil but changes the company permanently for the better. If you have to be aggressive about user acquisition when you’re small, you’ll probably still be aggressive when you’re big. If you have to directly face clients and get rejected, you’ll learn things you couldn’t have learned otherwise. And most importantly, if you have to work hard to delight users when you only have a handful of them, you’ll keep doing it when you have a lot.

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