Morningstar - Q2 2021 - 10

Dispatches

The Next Great
Extinction
Asset managers are
adapting for
a new generation.
PHILLIPS CURVE

Don Phillips
Something odd is happening in asset
management. During a harsh period of declining
assets and painful layoffs, asset managers
are aggressively building their sustainable
investing capabilities and paying premium salaries
to lure scarce talent with proven environmental,
social, and governance credentials. The stark
contrast between existing staff facing elimination
with recent ESG hires enjoying new riches
must make for some stressful work environments.
Such are the growing pains of radical
transformation. Like it or not, the DNA of the
asset-management business is changing.
This is the second sweeping structural change
in the asset-management industry during
my career. The first started during the 1980s as
baby boomers entered their prime investing years.
Unlike their parents, most boomers didn't
have the security of a steady pension to safeguard
their retirement. Instead, they were shown an IRA
or a 401(k) plan and told to select the funds to
create their nest egg. Mutual funds were no longer
fun money on the edges of a portfolio. They were
the crux upon which a generation's financial
security rested. Boomers took charge, demanding
more information on which to base their decisions,
thus launching a boom in personal financial
journalism and creating opportunities for research
firms like Morningstar.
Boomers also demanded a new breed of
advisor, not the chatty corner-office broker with
whom their father played golf. They wanted
informed advisors who would work diligently in

10

Morningstar Q2 2021

their interests, thus giving rise to the independent
advisor model and credentials like the Certified
Financial Planner program. Asset managers altered
their playbook in response, hiring a radically
different type of sales staff. No longer would
wholesalers be back-slapping buddies with open
expense accounts offering sales tips and
sponsoring contests. The new breed of fund sales
professional would hold a CFA, have access
to the firm's investment staff, and be able to assist
the advisor in addressing serious client concerns
around portfolio positioning. The DNA of the
industry shifted from one in which funds were sold
to one in which funds were bought.
In this new environment, power shifted
from asset managers that controlled distribution,
like the big wirehouse fund complexes
that once dominated the market, to shops that
delivered outstanding investment results at a
reasonable cost. What mattered now was not your
ability to sell funds, but that your funds were
worthy of being bought. Existing firms that already
had great investment processes even though
they lacked distribution power, such as T. Rowe
Price TROW and Vanguard, flourished in this new
environment, as did once-obscure shops like
Dodge and Cox and Janus. Brokerage firms and
banks, which clung to the old sales model,
by and large languished. The changing demands of
a new generation of investors led to a restacking
of the asset-management hierarchy. Those
shops that altered their DNA for the new realities
survived. Those that did not perished.
Today, we're seeing a similar generational
shift as millennials enter their prime investment
years. Their challenge is not how to be a
smart buyer of funds. Boomers have made that
easier. Boomers' push for better information, better
service, and better products led to the rise
of indexing, the development of exchange-traded
funds, and the creation of elegant solutions like
target-date funds. It's very likely-the recent
GameStop GME fiasco aside-that millennials as
a group will be good buyers of financial assets
simply because they have better offerings to
choose from than boomers did in their youth. But
millennials want something more. They want
to be responsible owners as well as good buyers.
They want their money to reflect their values and

beliefs. Of course, many boomers want this, too,
which adds fuel to the industry's race to
establish the data and standards that will allow
today's investors to connect the money they invest
to the impact it has on the world around them.
Of course, sustainable investing is not just about
reflecting values and beliefs. In a changing
world, ESG analysis reveals risks and opportunities
that conventional analysis might not account for.
But asset managers can incorporate these
factors into the investment process much as they
did the sweeping changes brought on by
the Internet and e-commerce-without fanfare.
Creating separate ESG teams and launching
designated ESG funds are signals to investors that
asset managers are committed to meaningful
and lasting change.
This transition will require enormous cultural
shifts-as did the switch in mindset from
funds being sold to funds being bought. Asset
managers cannot draw a line separating
their ethics and their profits if their clients no
longer draw such a line. Building upon the
last generational change, this one will put even
more power and more responsibility in the
hands of shareholders and their advisors to
safeguard their future security and quality of life.
But where the boomers looked to retool asset
management to better meet their needs,
millennials aspire to something even greater-
to redefine capitalism in order to make the world
a better place. They are asserting their rights
as owners, demanding a cleaner planet, real social
justice, and better stewardship. Those asset
managers that can meet these expanded
expectations will survive. Those that cling to their
old ways will perish. That's why smart mutual
fund managers are scrambling to alter the
DNA of their workforce, even during a period
of general belt-tightening. Evolution is a
ruthless process. K
Don Phillips is a managing director at Morningstar. He is a
member of the editorial board of Morningstar magazine.
Morningstar - Q2 2021

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