Boutique investment firms have become increasingly more attractive in the wealth management marketplace in recent years because their managers, who often have left larger, more- traditional work environments, tend to have a great passion for markets and investing. Moreover, they have conviction in the investment processes that they have developed and a fervent commitment to disciplined execution of those processes.
These qualities have the potential to produce attractive investment results for investors whose risk profiles match a firm’s offerings
A boutique approach allows for the development of a closer working relationship with advisers. The focus being on service, communication and understanding. However, outcomes do need to be consistent if not more effective than the mainstream DFM, the approaches to portfolio construction and investment management generally are almost commoditized to accommodate large fund flows within larger DFMs, this can reflect on outcomes.
Accountability within a boutique investment business focusses on what is important and connects the business more closely to the requirements and needs of both client and advisers as the underlying interests are aligned for all parties. This also offers much greater flexibility in adapting and reflecting on feedback loops and client’s needs.
There are many reasons that investment processes may be less crisp and decisive at larger firms. Larger firms may have greater liquidity issues. They may be forced to navigate bureaucratic work environments that don’t support sharp decision making. They may be more complacent if they don’t have a vested interest in performance and be less able to respond nimbly to changing market environments.
Boutique investment management firms on the other hand are built on the passionate belief that they can deliver solid and consistent risk-adjusted performance over time by employing well-defined and repeatable investment processes.
The challenges for advisers
Advisers understandably have the challenge of balancing perceived risks of adapting and or changing central investment propositions that potentially offer the benefits of greater flexibility with boutique investment alternatives, against the financial and resource strengths of more well-established counterparts and peer group. Whilst this creates an environment of a line of least resistance it also offers a higher level of correlation with very similar outcomes rather than diversity but does moderate these perceived risks.
Additionally the comfort of working with recognized wealth management brands provides an element of double due diligence for the adviser although the only slight issue has been the attraction of financial planning businesses to larger discretionary wealth managers that have now invariably ventured into acquiring their own financial planning resources offering potential conflicts of interest.
Recent regulatory and legislative changes in the last 18 months such as PROD is leading to a greater focus on diversity and reviews of central investment propositions which expands the importance of the adviser in determining an appropriate and potentially a more specific range of investment options.
As the industry’s and investors’ perceptions change, assets under management may become a less important measure of a firm’s investment success. If it is replaced by the quality of a firm’s investment offerings and the significance of those offerings in asset allocation strategies, then boutique management firms may start to lead the way.
As you search for discretionary investment managers who have the potential to deliver strong results, be sure to consider boutiques.