Investors are no longer willing to accept premium fund pricing for commoditised products. This is leading to falling management fees and shrinking margins for many asset managers.
“Branding is not merely about differentiating products; it is about striking emotional chords with consumers. It is about cultivating identity, attachment and trust to inspire customer loyalty.” – Nirmalaya Kumar
Investment managers should address direct investors’ unique pain points, create value outside of the fund product and deliver a superb customer experience that is not easy to replicate.
Only through such product differentiation can the manager erect a barrier around its business that will sustain premium fund pricing.
Commoditisation threatens investment managers’ business models
Our previous blog post covering a boutique manager’s first digital steps, highlighted the downward trend of investment management fees, due to a number of factors:
- Superannuation funds try to create value for their members through asset allocation and minimising management fees rather than seeking to identify higher-performing funds in advance, in which to invest their members’ savings
- Managed funds are now benchmarked against the post-fee returns of beta products – whether fund managers like it or not
- Investment managers have little brand resonance at the end-investor level in markets such as Australia
- Funds are widely perceived to be somewhat ubiquitous
Managers are therefore facing pressure on fees from institutional clients. At the same time the bulk of the value of advised retail funds management is captured by the planners, platforms and in-house managers of the large vertically-integrated banking groups.
This leaves many investment managers struggling to evolve a sustainable business model even when they deliver high quality fund products.
Premium fund pricing in a standardised market
A recent report by Accenture1 framed the industry’s challenge thus:
“The growth of passive and alternative investments places significant pressure on “middle of the pack” long-only fund managers to develop differentiated strategies and operating models. Similarly, customers’ expectations of a better overall experience have pushed fund managers to develop a tailored approach to client engagement.”
Investment managers are facing squeezed management fees and business margins because their role in the value chain has been reduced to that of a B2B supplier of commoditised products.
The end investor (and any gatekeeper in the value chain) does not acknowledge sufficient value in the manager’s product that they are willing to pay fees beyond that of a generic fund.
They assume that all funds within an asset class have very similar characteristics and are likely to deliver comparable investment outcomes. The investor does not believe that the manager understands their unique pain points and is orientated to providing a valued solution.
In such circumstances it may well be that the investor and gatekeepers are quite rational in their reluctance to entertain premium fund pricing.
The role of differentiation
Therefore a transformation in the perception of an investment fund from a commoditised product to a unique and hard to replicate investment solution is required. This requires a quantum shift in the investor’s understanding of the manager and its product.
In order to effect this change the manager must position itself carefully in the mind of the target investor. This positioning process has a number of elements:
- Demonstrate a detailed understanding of the pain points to be addressed by the fund
- Identify an outcome-focussed investment objective that will be valued by those investors that are sensitive to the identified pain points
- Link this outcome to the fund managers’ investment methodology
- Demonstrate a superior insight that will deliver a sustainable competitive advantage in addressing the target market’s niche
- Create an awesome client journey
- Validate the process by demonstrating fund product quality using quantitative metrics and client testimonials
The impact of differentiation
Such a process can effectively differentiate the product from ‘just another ubiquitous product’ to a unique solution that delivers the expected long-term outcome that the investor requires.
Hence the fund is inestimably better positioned to command premium fund pricing within its target market.
Furthermore a differentiation strategy can help to de-couple fund flows from short-term investment performance.
According to a blog by DeSantis Breindel2: “a strong differentiated brand…can’t disguise poor returns. But it can build and sustain goodwill to carry an asset manager over the inevitable rough patches.”
Implementing a product differentiation strategy
Investment managers should think about three approaches as they seek to differentiate their product:
- Sharing Insight – using digital techniques such as blogs, videos, podcasts, webinars, white papers, e-books, etc. distributed through social channels, investment managers can tell stories that address investors’ pain points and demonstrate a unique competence in their chosen niche
- Developing a relationship – simple automation tools can deliver a unique flow of content that can lead to an engaged relationship with the manager whilst the investor progresses along their investment journey prior to investing in funds; on-line forums can facilitate learning between investors and managers
- Delivering a valued customer experience – investment managers have tended to offer an on-line experience that focuses on the manager itself; however by providing on-line advice tools that deliver value, offering content tailored to the individual, connecting through preferred social channels and above all by delivering value rather than promoting products, the manager can establish itself as a candid friend and a differentiated business partner
Such a strategy can establish a defensive moat around a business that will allow premium fund pricing.
The outlook for the undifferentiated investment manager is becoming very bleak indeed.
The direct market’s willingness to pay generous investment management fees for easy-to-replace investment outcomes has been eroded by a focus on fees and the availability of low-cost beta funds.
In order to prosper in the new world it is not sufficient for the manager to offer unique investment outcomes. It must be willing and able to deliver value to clients and prospects outside of the fund product.
It must be able to demonstrate that it understands investors’ pain points and is willing to share its insight in order to demonstrate a superior competence in the chosen market segment.
This must take place within the parameters of an outstanding customer experience. This requires the manager to lead investors comfortably through their investment journey as a trusted guide rather than as a seller of products.
This creates tailored value that the investor would find hard to replace, thus enabling the investment manager to secure premium fund pricing in a commoditised marketplace.
How do you think investment managers can sustain premium fund pricing in the evolving market?
We have created a concise twenty-step guide to how an investment manager can establish a profitable and sustainable direct retail funds business through an engaged customer strategy; please click here to download.
‘Falling Prices Showing Less Promo and Text’ image courtesy of Stuart Miles at FreeDigitalPhotos.net
‘Storage Silos’ image courtesy of xedos4 at FreeDigitalPhotos.net
‘Stand Out Indicates Chosen One and Alone’ image courtesy of Stuart Miles at FreeDigitalPhotos.net
‘Castle’ image courtesy of xedos4 at FreeDigitalPhotos.net
1 Accenture, “High-Performance Asset Management”, Page 3, https://www.accenture.com/us-en/~/media/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Industries_5/Accenture-CM-AWAMS-High-Performance-Asset-Management.pdf
2 DeSantis Breindel, “Do All Investment Managers Tell the Same Story? How Brand Differentiation Drives Growth”, http://www.desantisbreindel.com/wp-content/uploads/Asset-Management-Branding.pdf