Sirianni: What Are Boutique Money Managers and Why Should We Care About Them?

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Boutique money managers are harbingers of the financial world to come. We watched over the past decade as ETFs moved in to displace traditional actively managed portfolios and famous stock pickers, from Warren Buffet to your uncle Joe, all touted Indexing as the only way to get real returns. Tomorrow, small money managers with the ability to be very nimble in the markets, and who have bespoke service models as well as real client access, will be the new disruptors. As the industry moves to an independent model where clients and advisors have the opportunity and desire to expand their investing horizons without the interference of a “big brother” firm, boutique managers will blossom.

Make no mistake, there will always be a place in the industry for large money managers, offering terrific historic returns, top analysts, and top of the line research capabilities. But the emerging boutique money manager space is growing because it is meeting the needs of the nascent independent marketplace. Small, maverick RIA firms, led by independent advisors, are looking beyond traditional sources for new investment ideas. They are starting with a new criteria and a new ability to search the world for investment excellence and looking beyond the short list of investments forced on them by wirehouse managers and their pay-to-play ethos.

We typically define a boutique as a money manager with less than $10 billion in AUM. We see an emerging trend of a return to boutique money managers, which makes sense given the capital markets behavior and changes in the financial advice delivery business.

So, what sets a boutique money manager apart, and why are advisors considering them more and more?  AdvisorHub teamed up with BPO Capital who asked dozens of boutique money managers for their take (thoughts/opinions).

Here are their Top 10 Reasons.

1. The Markets – the S&P 500 began a remarkable run starting in the Spring of 2009. The S&P 500 rose from 700 to 2900 by September 2018, an astounding move of 314%. With each passing year more clients and advisors decided, “if you can’t beat ‘em, join ‘em”. And with that, more money went into main stream indexes often assembled by large asset management companies. The desire for an active manager that took less risk or had better correlations, became less and less. When the FANG (Facebook, Apple, Netflix & Google) stocks really started to take off. This, coupled with historically low volatility and interest rates, it created a 9 ½ year run in the markets that was like Goldilocks and the Roaring 20’s all wrapped up into one. The next chapter will be one that includes active and differentiated strategies.
2. The Income Void – most clients and advisors have not experienced a rising interest rate environment for a long time (almost 30 years). This, coupled with the income needs of the retiring “baby boomers”, presents a major financial planning dilemma. How can retirees generate predictable income when we are at a historically low interest rate level? Modest movements up in rates can pose a serious risk to principal? Unfortunately, the answer will not be easy and will require an active solution of deft portfolio management to generate increasing cash flow, while not losing significant principal along the way. A smaller basket of bonds will be easier to navigate through what is likely to be a challenging decade ahead.
3. Need for Customization – a key expectation that clients tell us in surveys, is that there is a need for unique and custom solutions. Customization does not only pertain to risk profiling, but also to the special situations a client may have, including; concentrated positions, tax consequences, family history; social impact, and more. These variables lend themselves to a boutique solution driven by communication between client, advisors, and money managers.
4. Pricing flexibility – in dealing with small and mid-sized money managers, advisors find they can develop longer term strategic relationships. This may include an enhanced service offering; a pricing grid that offers flexibility; and choices in working together such as receiving signals versus being constrained by a platform.
5. Direct Relationship – boutique managers frequently want to speak with and/or spend time with the advisors who use their strategies. They feel it allows for better understanding of their value proposition, updated thoughts on the markets, and support toward winning and retaining clients. This is very difficult for large asset management company portfolio managers to do and is often delegated to marketing and sales personnel.
6. Expansion of the RIA business – with over 100,000 advisors in the RIA or RIA-Hybrid space, this once fledgling part of the industry that has turned into the leader. It is expected that RIA assets will soon overtake wirehouse and banks investment assets. This is primarily due to the increase of approximately 90,000 advisors in the last 15 years. Boutique managers have historically had difficulty getting on wirehouse platforms. RIAs want access to a broader range of services and solutions – in order to deliver best in class fiduciary solutions. This marriage between managers, TAMPs (Turn Key Asset Management Platforms), and advisors creates the potential for better client relationships and more efficient pricing.
7. TAMPs and Platforms emerge – the RIA and Hybrid growth has led to an explosion in TAMP offerings. TAMPs give the RIA a vehicle to create SMA and UMA solutions. TAMPs give advisors access to more solutions than are typically available at any one captive and isolated firm. TAMPs support big box asset management firms, but also make it easier for boutiques to run in parallel.
8. Tactical and Risk Management are back – for a boutique money manager to exist and survive it must generally do fewer things but do them very well. Furthermore, boutiques tend to live in the active and risk managed world, where they can create better differentiation. Tactical, Risk Managed, Dynamic, Hedged and similar strategies have been primarily looking up at the returns of the large indices. This seems to be in the process of changing now, and is evident if we r 4Q 2018 and FY 2018 returns.
9. What Clients Want – in the past, it has been very typical for advisors to include brand names as part of a sales process with clients. Meaning that if a client had heard of the asset management company, it made it easier for the advisor to position those assets in the client portfolio. This is changing as clients and advisors are shifting more toward finding the best, versus finding the most recognized.
10. Seeking the best performance – we have spent the better part of the last few weeks reviewing manager performance for 2018. In reviewing performance reports of domestic fixed income, domestic equity, and dynamic asset management, there is no prejudice between large and small asset management firms. The top quartile is roughly divided equally between big and small firms. This reminds me of the saying “I want it all, and I want it now”, and hey, why not?

Tony Sirianni

Publisher & CEO

AdvisorHub