Asset management industry needs to improve culture and repair trust, says non-profit

Cultural change

A culture shift is needed in the institutional investment industry to prioritise ‘soft’ factors like diversity rather than a single-minded focus on financial performance, says not-for-profit research group the Thinking Ahead Institute.

A report on its five-year study, The Power of Culture, stresses the importance of trust between asset owners and asset managers, and indicates that this has been weakened by poor culture within investment firms. 

This has led to a high turnover of manager mandates, as well as active manager roles dwindling because asset owners are choosing to allocate to passive mandates, in-house mandates, and smart betas.

The Thinking Ahead Institute says the “obsessive pre-occupation with investment performance over short-term periods” is not helping managers produce sustainable value. 

Across the industry value chain, it is not clear whether performance is the lynchpin of a successful partnership between asset owner and asset manager. A 2019 survey of institutional investors by Allianz Global Investor found that performance was a top priority for 48 per cent of investors when choosing a manager, but that other considerations carried almost as much weight. 

Most organisations preferred working with managers on a long-term basis, and as such 41 per cent said they would prioritise a manager’s understanding of their institution’s objectives, structure and challenges.

Roger Urwin, co-founder of Thinking Ahead Institute, notes that financial performance is still the dominant metric: “We measure what we do because we can. But we can measure more than what we currently do. The understanding and assessment of so-called ‘soft’ or intangible factors represent a key step forward for institutional investors.”

Institutions appear to be taking it seriously, with institutional investors including RBC, Morgan Stanley, and Goldman Sachs all announcing pushes for greater diversity within their firms in recent weeks.

“Asset owners have tried to get closer to their asset managers and with this increasing engagement are looking more closely at how they operate, the reliability of their performance, the integrity of processes and their sustainability characteristics. Of late this scrutiny has focused in on culture and diversity as an increasingly reliable indicator.”

He says that now the managers that have recognised the importance of culture are gaining a “considerable comparative advantage”. These firms have also responded best going into the Covid-19 crisis and as worldwide protests against racial injustice took hold. 

“There are now a number of investment organisations globally able to differentiate themselves with their purpose and culture. The factor most indicative of edge here is leadership commitment to elevating and actively shaping culture in the organisation,” says Urwin.

While he does not identify specific firms, he says these investment organisations have managed to raise corporate culture, diversity, and client-centric focus, to higher levels of effectiveness. “In these cases, excellence in any one item has rubbed off on the other two. The common characteristic of these case studies has been using a fact-base to record and measure progress within the organisation on these attributes as well as a clearly articulated vision of how to improve.”

Urwin says that when it came to the firms that lagged behind, the most common causes of trust being damaged arose from “managing expectations poorly with inconsistencies in communication and client relationship management being top factors”. 

The Thinking Ahead Institute has concluded with a call to action, making three recommendations for asset managers and asset owners. The first is to develop a unique organisational purpose, expressing in accurate and realistic terms what their clients and stakeholders can expect, performance-wise. Firms should also develop a culture dashboard to track all dimensions of culture, and “create a common language and fact base for culture” based on aspirational targets.

“Trust by asset owners grows when asset managers show commitment to inform, engage and be strategically valuable. The relationships where trust is strongest are more like strategic partnerships, and we see these becoming increasingly important in asset management success,” says Urwin.