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The Next Great Extinction in Asset Management

Asset managers are adapting for a new generation.


Editor's note: This article first appeared in the Q2 2021 issue of Morningstar magazine. Click here to subscribe.

Something odd is happening in asset management. During a harsh period of declining assets and painful layoffs, asset managers are aggressively building their sustainable investing capabilities and paying premium salaries to lure scarce talent with proven environmental, social, and governance credentials. The stark contrast between existing staff facing elimination with recent ESG hires enjoying new riches must make for some stressful work environments. Such are the growing pains of radical transformation. Like it or not, the DNA of the asset-management business is changing.

This is the second sweeping structural change in the asset-management industry during my career. The first started during the 1980s as baby boomers entered their prime investing years. Unlike their parents, most boomers didn’t have the security of a steady pension to safeguard their retirement. Instead, they were shown an IRA or a 401(k) plan and told to select the funds to create their nest egg. Mutual funds were no longer fun money on the edges of a portfolio. They were the crux upon which a generation’s financial security rested. Boomers took charge, demanding more information on which to base their decisions, thus launching a boom in personal financial journalism and creating opportunities for research firms like Morningstar.

Boomers also demanded a new breed of advisor, not the chatty corner-office broker with whom their father played golf. They wanted informed advisors who would work diligently in their interests, thus giving rise to the independent advisor model and credentials like the Certified Financial Planner program. Asset managers altered their playbook in response, hiring a radically different type of sales staff. No longer would wholesalers be back-slapping buddies with open expense accounts offering sales tips and sponsoring contests. The new breed of fund sales professional would hold a CFA, have access to the firm’s investment staff, and be able to assist the advisor in addressing serious client concerns around portfolio positioning. The DNA of the industry shifted from one in which funds were sold to one in which funds were bought.

In this new environment, power shifted from asset managers that controlled distribution, like the big wirehouse fund complexes that once dominated the market, to shops that delivered outstanding investment results at a reasonable cost. What mattered now was not your ability to sell funds, but that your funds were worthy of being bought. Existing firms that already had great investment processes even though they lacked distribution power, such as T. Rowe Price TROW and Vanguard, flourished in this new environment, as did once-obscure shops like Dodge and Cox and Janus. Brokerage firms and banks, which clung to the old sales model, by and large languished. The changing demands of a new generation of investors led to a restacking of the asset-management hierarchy. Those shops that altered their DNA for the new realities survived. Those that did not perished.

Today, we’re seeing a similar generational shift as millennials enter their prime investment years. Their challenge is not how to be a smart buyer of funds. Boomers have made that easier. Boomers’ push for better information, better service, and better products led to the rise of indexing, the development of exchange-traded funds, and the creation of elegant solutions like target-date funds. It’s very likely—the recent GameStop GME fiasco aside—that millennials as a group will be good buyers of financial assets simply because they have better offerings to choose from than boomers did in their youth. But millennials want something more. They want to be responsible owners as well as good buyers. They want their money to reflect their values and beliefs. Of course, many boomers want this, too, which adds fuel to the industry’s race to establish the data and standards that will allow today’s investors to connect the money they invest to the impact it has on the world around them.

Of course, sustainable investing is not just about reflecting values and beliefs. In a changing world, ESG analysis reveals risks and opportunities that conventional analysis might not account for. But asset managers can incorporate these factors into the investment process much as they did the sweeping changes brought on by the Internet and e-commerce—without fanfare. Creating separate ESG teams and launching designated ESG funds are signals to investors that asset managers are committed to meaningful and lasting change.

This transition will require enormous cultural shifts—as did the switch in mindset from funds being sold to funds being bought. Asset managers cannot draw a line separating their ethics and their profits if their clients no longer draw such a line. Building upon the last generational change, this one will put even more power and more responsibility in the hands of shareholders and their advisors to safeguard their future security and quality of life. But where the boomers looked to retool asset management to better meet their needs, millennials aspire to something even greater—to redefine capitalism in order to make the world a better place. They are asserting their rights as owners, demanding a cleaner planet, real social justice, and better stewardship. Those asset managers that can meet these expanded expectations will survive. Those that cling to their old ways will perish. That’s why smart mutual fund managers are scrambling to alter the DNA of their workforce, even during a period of general belt-tightening. Evolution is a ruthless process.

Don Phillips is a managing director at Morningstar. He is a member of the editorial board of Morningstar magazine.

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