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Global regulatory landscape putting “big squeeze” on boutique asset managers, says TABB

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Over two-thirds of boutique asset managers say they have been overwhelmed by increasing regulatory requirements and the industry’s “institutionalism”, according to a survey by TABB Group.

 
The survey, conducted in September 2013, of 202 boutique asset managers from around the world, found that increased regulatory requirements have led to higher hurdles for raising assets and rising cost-to-income ratios.
 
As a result of this unfavourable environment, boutiques are feeling the effects of a “big squeeze”, where the big get bigger, smaller firms prosper in a niche and firms in the middle are forced to shrink.
 
“Perhaps this is what the regulators wanted,” says Adam Sussman, a TABB partner, director of research and co-author with research analyst Valerie Bogard of “Boutique Business Model Under Attack: Bruised by Regulation, Crippled by Costs?” 
 
Forcing consolidation by increasing compliance costs, Bogard adds, would certainly make policing the industry more manageable. But regardless of intent, she says, TABB believes a dearth of boutiques would represent a negative for both the investor and industry alike. “A high degree of industry concentration is only likely to exacerbate the issues that cause investors to pause – cross-asset correlations, lack of outperformance and pricey management fees.”  
 
Boutique asset managers have a unique arsenal of advantages as they are able to embrace entrepreneurialism and act quickly with few “middlemen” and little time-consuming bureaucracy due to their smaller staff sizes. Everyone likes to root for the underdog, Sussman says, but boutique asset managers are underdogs for a reason, and the most problematic issue that over 50 per cent say they face in the next 12 months is the increasing expense of regulatory compliance – that costs are rising as new regulations are being implemented and enforcement agencies are conducting more inspections and demanding more requests for information.  
 
While the Goliath-sized, “too-big-to-fail’ firms continue to raise assets, boutiques run the risk of being “too small to succeed, which is why the odds can seem stacked against a new boutique. Asked what their biggest barrier to entry was, over 50 per cent pointed to institutionalisation, the burden of due diligence and compliance. The larger firms, says Bogard, can spread costs across a significant revenue base but scale is the feature the boutiques know they lack. “Technology and better operations are the keys, which may include outsourcing, an emerging trend, named by less than 33 per cent of the firms.”   
 
Despite the obvious challenges facing boutique asset managers, Sussman says, they believe they have a more focused offering – a slingshot that can take aim at the Goliath-sized firms.  “These advantages are embedded in the definition of a boutique: nimble entrepreneurs with a niche focus and ownership structure that incentivises long-term sustainable businesses with a client-centric philosophy. It’s no wonder then that the three most popular cars that participants identified with boutiques were Audi (22 per cent), Mercedes-Benz (22 per cent) and Volvo (17 per cent), showing a focus on conservative approaches and longer term value rather than flashy and fast investment vehicles. Only 16 per cent related to a Ferrari.”
 
According to Sussman and Bogard, the question still remains: under attack by regulators, how will these boutique asset managers throughout the world survive the “big squeeze?”

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