More than half (53%) of boutique asset management firms identified 'institutionalisation', including the increasing expenses related to regulatory compliance, as the 'make or break' factor for them over the next 12 months. This is defined as the growing list of operational and organisational minimum requirements an asset manager must meet in order to attract assets.
The report entitled "Boutique Business Model under Attack: Bruised by Regulation - Crippled by Costs?" reveals that 51% of those surveyed find the Institutionalisation burden of due diligence and compliance as creating a barrier to entry. This now ranks as the top barrier to entry, moving last year's top entry, the general cost of setting up operations, to the second spot at 44%.
"Growing operational and regulatory minimum requirements such as AIFMD, Dodd Frank and UCITS IV/V are leaving many boutique asset management firms unable to take part in the mandate process," says Adam Sussman, partner and director of research, TABB Group. "Scale is the feature that boutiques believe they lack, and technology and better operational efficiency is the key to achieving increased scalability."
Ed Lopez, executive vice president at SunGard's asset management business, explains that boutiques pose less systemic risk than large institutional managers, yet due to the high cost of compliance and a proliferation of regulation they are the ones under greatest threat.
"So while the 'too big to fail' firms continue to raise assets, boutiques run the risk of being 'too small to succeed'," notes Lopez. "They need to be more focused and self-aware as they navigate their way through this regulatory uncertainty."
Lope says that boutiques must invest in technology, improve their operational efficiency and look seriously at outsourcing any function that does not relate to their core competency of investing - especially those related to compliance and reporting.