The paradox of rising markets

Winning new assets should be a core discipline for both wealth and asset managers, even if market gains are boosting their AUM without the hassles of marketing, advertising, or sales.

Everyone cheers as the markets rally. After all, investors are making more money, and advisors and asset managers are too. As markets rise, asset managers, EFT issuers, and fee-based advisors increase their income, since they generate their revenue based on how much money they manage – what the industry calls assets under management or AUM. These market gains have translated into the industry becoming reliant on the market to increase its revenue. The markets’ rally usually far outpaces efforts to add new AUM, especially over the last 15 years.

Why work to gain new assets when a bull market raises your AUM without the hassles of marketing, advertising, or sales?

I believe that this mindset is a missed opportunity and poor risk management from a business perspective. Both asset managers and wealth managers depend on scale to grow profitable businesses. Once a firm attains a certain size, the market becomes the largest driver of increased AUM, and therefore income. It’s easy then, in up markets, for winning new investors to no longer be a priority or even a core discipline. A 20 percent rise in the markets can equal a 20 percent rise in revenue with no additional overhead – a wonderful cause and effect.

As a former chief investment officer and an ETF designer, I understand the mindset; the portfolio management side of the business generally rules the firm. Most firms are founded by people who can create and maintain strong products. However, many things have evolved over the years that necessitate a change in the way that AUM is conceptualized. For instance, lower-cost EFTs have disrupted much of the industry, causing wealth managers and even alternative investments to come under fee pressure. The lower the fees, the more assets it takes to sustain a profitable firm.

Investors tend to cluster, allocating to big firms because it seems “safe”; big firms have big brands almost by default. Why don’t we reward both wealth and asset managers that have the best performance, either absolute or risk-adjusted? That type of meritocracy seems so simple. However, simplicity has been taken out of this equation because many asset managers offer a wide range of products, so performance becomes muted. Wealth managers offer blended portfolios for diversification, and craft portfolios based on the stage of life and the risk tolerance of their clients, making the measurement of performance nearly impossible and frequently irrelevant.

I encourage the industry to focus on winning new assets. When markets are flat or down, or new products are launched, both industries turn to sales and marketing, referrals, and whatever it takes to bring in new assets since the markets themselves are not making them more money – yet.

I believe the industry is losing out on what could be much larger revenue increases if it consistently won new investors and their AUM. This added core discipline is also strong business risk management. Most wealth management firms do not have marketing departments. Large RIAs have marketing departments, but recruiting advisors is nearly their sole focus, along with some corporate branding. I believe that not focusing on winning new investors is a significant missed opportunity.

Advertising that targets specific professions and demographics has never been more precise. There is now an industry called investor acquisition (a phrase I coined) that addresses this discipline. Marketing and social media are changing the attitudes and perspectives of investors of all experience levels and portfolio sizes. Add the great generational wealth transfer, and there is an awful lot of AUM up for grabs.

Ten to 15 years ago, attracting new assets outside of personal relationships used to be an art mixed with some science. In 2024, it is science mixed with some art. Not unexpectedly, the industry is years behind the rest of the business world in its solicitations. This isn’t an indictment of the industry, it’s a wake-up call that mixing market gains with new AUM equates to more than compounding alone can achieve.

Winning new AUM should be a core discipline for both wealth and asset managers. If this is instilled in the industry, I believe its future, regardless of the markets, or the advent of robo-advisors, or AI, will be far more secure.

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Andrew Corn heads E5A Integrated Marketing, a systematic, data-driven investor acquisition agency, and is a former CIO and ETF designer.