The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

The Business of Money Management

Before we look at working with traditional and alternative managers in depth, let's take an overall look at some of the challenges active managers face. We'll start by following a new U.S. large-cap management firm to see how it operates.

Hapless Asset Management

The principals of Hapless Asset Management, having worked extensively in the money management industry, understand all too well the dynamics of the business. They know, for example, that attracting new clients—especially private investors—is a difficult, time-consuming, and expensive activity. But they also know that once a client has signed on, the marginal cost of servicing that client's account will be negligible. After all, Hapless will buy and sell pretty much the same stocks for every client, so it can manage $10 billion almost as easily as it can manage $100 million. Sure, clients sometimes want to meet with Hapless too often (from Hapless's perspective), but most clients soon settle into a routine that is highly cost effective for Hapless. After all, clients are busy people, too.

Thus, the main challenge for Hapless is to keep the clients it gets. Those clients provide an annuity income for Hapless, and given the cost of obtaining new clients, Hapless wants to do everything it can to avoid losing accounts. The main way Hapless is likely to lose accounts is for the firm to generate truly dismal performance numbers. If the numbers are really awful, clients will defect after one year ...