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Who will be the Starbucks of the Asset Management Industry?

by Lindsay

I recently finished reading renowned pollster and political strategist Mark Penn's new book, Microtrends: The Small Forces Behind Tomorrow's Big Changes. In the book, Penn identifies 75 "Microtrends" which he defines as, "[a]n intense identity group that is growing, which has needs and wants unmet by the current crop of companies, marketers, policymakers and others who would influence society's behavior." He argues that these groups of people, comprised of as little as one percent of the population, will have the biggest influence on public policy and corporate marketing in the future, as the population becomes increasingly heterogeneous, in terms of interests and preferences.

One analogy that Penn carries throughout the book is the idea of the "Starbucks economy" of today, versus the "Ford economy" that prevailed for much of the twentieth century. He argues that consumer attitudes have moved from the ideal of mass production to that off mass customization. When the Model T Ford came out in the early 1900s, millions of the exact same black cars were sold to satisfied consumers. Today, a customer walks into Starbucks and can choose from literally hundreds of variations on the standard cup of coffee. This level of customization is also available when shopping for cars, clothing, or cellular phones today.

The idea of the Starbucks economy got me thinking about the asset management industry. A paradox that we often discuss at kasina is that, in order to be competitive, asset managers tend to "follow the leader" and continuously grow their product lineups to try to be everything to everyone. By doing this, they actually become less differentiated and the industry becomes more commoditized. The logic behind this runs counter to Penn's assertions in Microtrends and similar ideas presented by Chris Anderson in his book The Long Tail. According to these authors, society is actually becoming more fractionalized, and people's needs are more diverse than ever.

A few questions come to mind:

• Given this societal shift, when are asset managers, who often pay lip service to the idea of selling "solutions" as opposed to "products," going to begin catering to the needs of individuals and small groups, rather than just offering everyone the black Model T Ford?
• While a degree of customization is available for certain investors through products like separately managed accounts and variable annuities, why are mutual funds one-size-fits-all?
• Because they have been spoiled by the level of customization available to them in their consumer lives, will younger generations reject mutual funds as an asset class?

These questions are important considerations for asset managers to ask as they devise future growth strategies and develop new products. The opportunity to be the Starbucks of the asset management industry is open to any firm willing to take the plunge.