The late Harvard Business School professor Clayton Christensen has found that in many industries, low-end disruptors typically settle at the bottom of the market and then work to satisfy more demanding market segments. This same phenomenon occurs in the investment management industry. The industry is now showing the traditional characteristics of an industry ripe for disruption – obviously disgruntled customers and highly profitable incumbents.
In order to understand the next wave of disruptors, we use Professor Christensen’s formal framework of disruptive innovation. He popularized the idea of analyzing a business by looking at the “jobs to be done” that his clients needed. Most fund managers think their main job is to generate alpha, but they are wrong. According to Amanda Tepper, CEO of Chestnut Advisory Group, investment performance alone does not drive asset flows.
We summarize below all the work to be done by an investment manager in each category, through the technical, functional and emotional advantages. For example, Vanguard Group offers not only the technical and functional advantages of a low cost investment, but also the emotional advantages of trusting, putting customers first and not making excessive profit.
The hierarchy of tasks to be accomplished by investment managers
Technical: what the product / experience does / is – “the offer”
- Investment strategy: generate alpha; don’t waste (too much) money; match debts and obligations; minimize expenses and taxes; exposure to targeted sectors; bequeath / achieve political or social goals; and protection against tail risks.
- Execute investments: research / generate investment ideas; research / due diligence; make investment decisions; manage wallet and exit.
- Administer investments: Administration; build optionality; respect for law and religion; and transfer the wealth to the heirs.
Functional: what the product / experience brings to the customer – “execution”
- Simple and practical user interface; Customer service; access to networks; education; self-discipline.
Emotional: How the product / experience makes the customer feel – “the tone”
- Peace of mind; social validation; exclusivity; control; excitation.
Technical work to be done
A fund manager needs to perform all technical work to an acceptable level just to get into the game. We have listed the top technical jobs below, in roughly descending order of importance. We divide them into three sub-categories: (a) investment strategy; (b) execute investments; (c) administer investments.
Some investors seek to optimize the highest returns before any other goal. They can generally tolerate prolonged volatility.
Yield-oriented investors may want to invest in the most nascent asset classes, which have historically generated astronomical returns for early investors. Historical examples include art, carbon credits, collectibles, cryptocurrencies, frequent flyer miles, Internet domain names, individual lifetime income, litigation funding, mining rights, patents, receivables, recurring business SaaS revenue, non-fungible tokens (NFTs), social media accounts, third-party FBA sellers on Amazon, and other virtual currencies such as video game currencies.
These asset classes generally lack liquidity, legal protection, credibility with professional investors and indices, and they present an extremely high risk. However, as they develop, these asset classes augment more of the infrastructure of larger, established asset classes.
Likewise, angel investing is the most profitable asset class to our knowledge, with median returns of 18% to 54% over 12 university studies. However, angel investing has long duration, extreme dispersion, high time requirements, and poor visibility.
Don’t waste (too much) money
People hate losing money more than they care about making money. The clearest example to meet this need is that of specialists in structured products, such as Axio Financial. Halo is a two-sided marketplace connecting investors to structured products offered by the world’s leading financial institutions, facilitating access to these instruments.
Match liabilities and obligations
Pension funds are the best example of investors who do not prioritize obtaining the highest possible return, but want the assurance that they can meet their financial obligations on time. Even a family office that may not have a legal obligation to pay pensions should plan ahead when it will get cash from the other side of its illiquid investments.
Universal responsibility is inflation. Inflation-linked bonds are an innovative tool for dealing with this liability, alongside traditional inflation hedges such as real estate and commodities. In some markets accustomed to high inflation, such as China and India, silver makers choose to invest a significant portion of their wealth in gold.