Operational Lessons for New Boutique Asset Managers

From the largest institutions to the smallest boutiques, today’s asset managers all face similar, well-documented challenges: regulatory requirements, pressure on fees, shrinking margins and more cautious investors. But for the start-up boutique, one overarching challenge in particular can create a major barrier to entry – the “institutionalization” of the industry.

With a growing list of operational, due diligence and compliance requirements that boutique asset managers must meet to inspire investor confidence and raise assets, it is becoming increasingly expensive and difficult to launch an asset management business. At the same time, however, the need to achieve institutional credibility is driving firms to focus as never before on improving their operational infrastructure. This in turn is helping them not only to increase efficiency and reduce costs, but also to seize the major opportunities that the market currently offers boutiques.

For, in an uncertain investment climate, where room for undifferentiated, mid-sized firms is shrinking, many entrepreneurial, specialized boutiques have actually held their ground against the odds and prospered in their niche. Along the way, they’ve learned some valuable lessons that point the way for new boutiques to emerge and flourish.

In a recent study of more than 200 boutique asset managers in 38 countries, Tabb Group asked established firms what they’d do differently if they were starting up today. With the benefit of hindsight, the majority recommended getting operations in order before anything else. By prioritizing infrastructure sooner, some felt they would have been better equipped to navigate regulatory requirements. Others wished they’d “thought big” from the start in terms of operational scale or had prepared better for growth.

The good news is that, as well as the wisdom of their predecessors, today’s start-ups can benefit from a new generation of more affordable technology and cost-effective outsourcing arrangements. Several years ago, these automated, scalable, front-to-back-office solutions and managed services were simply not affordable for new boutiques. But the world of asset management has changed, and technology continues to adapt to its needs. So now, in fact, boutiques can start up as they mean to go on – with institutional standards of infrastructure that satisfy regulators and investors alike.