Empowering boutiques: Regulatory impacts and operational limitations

In the second of a series of articles, Paola Bergamaschi, head of Client Relationship Management at State Street Global Markets, looks at factors often perceived to be barriers for boutique operations.

In our previous article, we explored the opportunities for boutique asset managers amid increased investor interest in specialised, alpha-generating strategies. However, while investors’ hunt for new sources of returns points to a positive outlook for boutique managers, the overall market context poses significant challenges.

Regulatory Impacts and Operational Limitations

Chief among these challenges is the rise in regulatory complexity and potential cost. Following the financial crisis and several high-profile frauds, regulators around the world are implementing new rules designed to improve market stability and transparency. These rules place a potential financial and administrative burden on asset managers, which may prove particularly challenging for boutiques given their relatively limited resources and smaller scale.

In the 2012 State Street Global Survey of Boutique Asset Managers conducted by the Economist Intelligence Unit in March, 22 percent of respondents reported that their ability to capture and report regulatory data needs improvement. When asked about the greatest challenges their organisations face in meeting today’s regulatory requirements, nearly one-third of managers cited insufficient knowledge of local regulatory guidance. Regulatory uncertainty was also the top barrier in relation to product development, and one in five cited regulatory approval as their single greatest challenge when trying to quickly bring new products to market.

Boutique asset managers concede that preparations are necessary as they face an increasingly complex global regulatory regime. Comparing the results of this survey with State Street study of larger asset managers in Europe also completed in March 2012; however, boutique managers are less likely to have started investing in in-house systems to stay ahead of regulatory change. Only 23 percent of European boutique managers are already investing in preparation for regulatory change compared with 48 percent of their larger counterparts. The majority (61 percent) reported that they are waiting to see how regulations change before they make the required investment.

Demand for transparency and accountability is coming not just from regulators but from investors too. For example, the Eurozone sovereign debt crisis has reinforced the need for diligent risk management and, across the board, managers are being asked to provide frequent, consolidated and more granular data about securities, transactions and portfolios, and to present this data in terms of how their clients think about risk. This task is especially challenging for boutiques, because their operational and information technology structures may be less flexible and scalable than those of larger firms. Indeed, when asked to rate their operational/IT structure in primary markets, 32 percent of boutique managers said it was in need of “some” or “considerable” improvement.

In contrast to some larger asset managers, who may have regional offices, ample marketing budgets and sales teams around the globe, boutiques may find it difficult, with their limited resources, to raise brand awareness and cultivate a wide network of contacts outside their local markets. In some cases, a lack of scalable infrastructure impedes boutiques’ ability to expand. In particular, the still-widespread reliance on manual processes represents a major challenge. Globally, more than one-third of boutique managers viewed back-office operations as one of the least effective areas of their organisation and more than a quarter viewed their middle-office operations as weak. For more details of how boutique managers view their operational effectiveness, see the full report at www.statestreet.com/vision.

In the final instalment of our series – ‘Empowering Boutiques’ – we will examine the optimal model for boutique asset managers that can help them meet the growing demands of regulators and clients while staying focused on their core business of developing niche expertise and generating alpha.

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