Are you getting squeezed?

Seuk Kim

by Seuk Kim

This week’s Economist takes a look at the fund management industry, which they compare to books and music. If you’ve been to a book store lately, you’ll notice that the majority of the people are there for the coffee and magazines. If you’ve been to a record store lately…wait, are record stores still around?

The reason for comparing fund management to books and music is due to the availability of cheaper and easier options. People buy most of their books through Amazon or e-books. Online books are almost always cheaper than buying them at the store and you never have to leave your home. People buy music through iTunes or similar options. Songs are not only cheaper, but you don’t pay for 13 songs from an album when you only want two of the songs—and again, you don’t have to leave your home.

So this brings us to our industry. The active managers (especially those from a boutique) are getting squeezed in every direction. There are larger shops offering similar funds for much lower expenses and index products that are even cheaper. Not only that, investors can now just buy ETFs from their brokerage accounts as easily as they would buy and sell a stock, and they don’t have to get professional advice to do so. Many investors say that they would rather go see a dentist than a financial advisor.

So, if you’re a small boutique fund manager, what can you do? Sure, you can lower your expenses to be more competitive but how low should you go? Dropping them to industry averages may not be enough. If you take a closer look, the funds that are actually selling might have expenses that are much lower than industry averages.

The good news is that you may not have to lower your expenses. There are funds out there with high expenses that sell quite well. If you have a good performing fund and can communicate your value proposition well to potential investors, they may be willing to overlook a higher than average expense ratio. Obviously, the key to communicating your value proposition is making sure that your target demographic is getting the message. For that, you need a sound marketing campaign, strong collateral materials, an engaging website and even some media relations. You know your value, but do your clients or prospects? It’s a competitive marketplace, so make sure your voice is heard.