The Clients of Asset Management Firms

Typically, asset management firms are categorized according to the kind of clients they serve. Clients generally fall into one of three categories: (1) mutual funds (or retail), (2) institutional investors, or (3) high net worth. Some firms specialize in one of the three components, but most participate in all three. Asset management firms usually assemble these three areas as distinct and separate divisions within the company.

It is critical that you understand the differences between these client types; job descriptions vary depending on the client type. For instance, a portfolio manager for high-net-worth individuals has an inherently different focus than one representing institutional clients. A marketing professional working for a mutual fund has a vastly different job than one handling pensions for an investment management firm.

1. Mutual Funds

Mutual funds are investment vehicles for individual investors who are typically below the status of high net worth (we will discuss individual high net worth investing later in this chapter). Mutual funds are also sometimes known as the retail division of asset management firms.

Mutual funds are structured so that each investor owns a share of the fund– investors do not maintain separate portfolios, but rather pool their money together. Their broad appeal can generally be attributed to the ease of investing through them and the relatively small contribution needed to diversify investments. Investment gains from mutual funds are taxable unless the investment is through an retirement plan. (If you take some money you’ve saved and invest in a mutual fund, you’ll have to pay capital gains taxes on your earnings.)

In the past 10 years, mutual funds have become an increasingly integral part of the asset management industry. They generally constitute a large portion of a firm’s assets under management (AUMs) and ultimate profitability.

There are three ways that mutual funds are sold to the individuals that invest in them–(1) through third-party brokers or “fund supermarkets”; (2) direct to customer or (3) through company 401(k) plans. The size and breadth of the asset management company typically dictates whether one or two of the methods are used.

Third-party brokers and “fund supermarkets”:

Over the past five years, an increasingly popular distribution platform for mutual funds has been to sell them through brokerage firms or “fund supermarkets.” By selling through these channels, asset management companies can leverage the huge access to the clients that the brokers maintain. In a classic broker relationship, a company with a sales force partners with several investment management firms to offer their investment products. Then, for instance, Merrill Lynch and Morgan Stanley not only sell their own mutual funds, but offer their clients access to mutual funds from

Vanguard, Putnam and AIM as well. This additional access to multiple mutual fund products helps the brokers win business; brokers earn a commission from the asset management companies they recommend. Brokers develop relationships with individual investors not only by executing trades, but also by dispensing advice and research. Fund supermarkets, such as Charles Schwab, became increasingly popular in the late 1990s. These firms are set up similarly to brokerage houses, but the supermarkets carry virtually every major asset management firm’s products, don’t expend as much energy on providing advice and other relationship building activities, and take lower commissions. The rise of the fund supermarkets has forced conventional brokerage firms to open up their offerings to include more than a few select partners. It has also influenced the way mutual funds market themselves. Previously, funds marketed to brokers, and expected brokers to then push their products to individual investors. Now, mutual fund companies increasingly must appeal directly to investors themselves.

Direct to customer:

Through an internal sales force, asset management companies offer clients access to the firm’s entire suite of mutual funds. This type of sales force is very expensive to maintain, but some companies, such as have been extremely successful with this method. Prior to the rise of brokers and fund supermarkets, direct to customer was the primary vehicle for investment in many mutual funds–if you wanted a Fidelity fund, you had to open an account with Fidelity.

401(k) plans:

An increasingly popular sales channel for mutual funds is the 401(k) retirement plan. Under 401(k) plans, employees can set aside pre-tax money for their retirements. Employers hire asset management firms to facilitate all aspects of their employees’ 401(k) accounts, including the mutual fund options offered. By capturing the management of these 401(k) assets, the firms dramatically increase the sale and exposure of their mutual fund products. In fact, many asset management companies have developed separate divisions that manage the 401(k) programs for companies of all sizes.

2. Institutional Investors

Institutional investors are very different from their mutual fund brethren.

These clients represent large pools of assets for government pension funds, corporate pension funds, endowments and foundations. Institutional investors are also referred to in the industry as “sophisticated investors” and are usually represented by corporate treasurers, CFOs and pension boards.

More conservative:

Given their fiduciary responsibility to the people whose retirement assets they manage, institutional clients are usually more conservative and diversified than mutual funds.

Unlike investors in mutual funds, institutional clients have separately managed portfolios that, at a minimum, exceed $10 million. Also unlike mutual funds, they are all exempt from capital gains and investment income.

3. High Net Worth

High-net-worth individuals represent the smallest but fastest growing client type. Individual wealth creation and financial sophistication over the past decade has driven asset managers to focus heavily in this area.

What is high net worth?

What is a high-net-worth investor? Definitions differ, but a good rule of thumb is an individual with minimum investable assets of $5 to $10 million. These investors are typically taxable (like mutual funds but unlike institutional investors), but their portfolio accounts are managed separately (unlike mutual funds, but like institutions).

High-net-worth investors also require high levels of client service. Those considering entering this side of the market should be prepared to be as interested in client relationship management as in portfolio management, although the full force of client relations is borne not by a portfolio manager but a sell-side salesperson in a firm’s private client services (PCS) or private wealth management (PWM) division. Says one investment manager about PCS sales, “If [clients] tell them they’re out of paper towels, they’ll probably go to their houses and bring them.”

Clients and consultants:

An investment management firm’s internal relationship management sales force typically sells high-net-worth services in one of two ways: either directly to wealthy individuals or to third parties called investment consultants who work for wealthy individuals. The first method is fairly straightforward. An investment manager’s sales force, the PCS unit, pitches services directly to the individuals with the money. In the second method, a firm’s internal sales force does not directly pitch those with the money, but rather pitches representatives, often called investment consultants, of high-net-worth clients. In general, investment consultants play a much smaller role in the high-net-worth area than the institutional side; only extremely wealthy individuals will enlist investment consultant firms to help them decide which investment manager to go with.


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