Boutique Investment Firms Re-Emerge As Banks Stagnate
There seems to be a common misconception among many outside the financial sector: your money is safe with the bank. In reality, your money is no safer with the industry giants than it is with any number of smaller players, case and point Merrill Lynch and Lehman Brothers.
It is names like Bernard Madoff and Charles Ponzi that scare people away from boutique investment firms, but the fact is, your money may be safer in these institutions than they are when investing with a large financial institution. Boutique investment firms offer a significant competitive advantage when compared to industry giants, especially the banks.
Though definitions vary, boutique investment firms usually have less than $2 billion in assets under management. They are typically employee-owned with key investment personnel being founders or significant owners. Thus, because these investment managers tend to have significant personal assets tied up in the business, their interests are closely aligned with shareholders.
This article outlines six competitive advantages boutique investment firms have over banks and large financial institutions.
Advantage #1: Continuity and Consistency of Investments:
One large reason boutique firms offer better performance is because they tend to be owner operated, which offers greater continuity. Portfolio managers at large investment firms or banks tend to get promoted, recruited by another firm, or leave, thus leaving your investments to another manager with different ideas and strategies. This is much less likely to happen with an owner-run fund. In fact, 11 of the top 20 performing equity funds in the last 10 years are managed by their founders.
Advantage #2: Agility and Flexibility
Since boutique firms are smaller, they have the agility and flexibility to make quick decisions, that larger investment firms do not because they are encumbered by layers of management and bureaucracy. Smaller firms are able to focus entirely on investment management. They are less focused on personnel and the bureaucratic issues that come up with a larger firm.
Advantage #3: Customized Service
For many retail banks who offer private banking services, private wealth management is only one of their divisions. They often have to share IT legacy systems, company policy, and customer relations, making it difficult for them to handle bespoke requests. Boutique banks are built to serve a few important clients. The company’s IT system, culture and service model are designed to meet the needs of highly demanding clients.
Advantage #4: Relationship Based on Trust
Boutique banks tend to treasure their relationship with clients, as the account means more to them than it does the bank. Many private bankers at boutique firms aim to cultivate strong relationships with their clients, where selling becomes secondary to maintaining long-term relationship. Many private banking clients therefore make decisions together with their bankers, instead of just placing market orders through them. Private bankers usually have a deep understanding of their clients, their family history, risk tolerance and investment philosophy; these types of insights are not commonly provided by the advisors at retail banks.
Advantage #5: No Conflict of Interest
Large retail banks will often put you into their own products, like mutual funds and growth funds, not because it is in your best interest, but because the bank gets management fees from both portfolio management and fund management. With boutique investment firms, the investment choices are based on what is best for you.
Advantage #6: Lower Management Fees
Because boutique investment firms have lower overhead, less administration, and less bureaucracy than commercial banks or large investment firms, they typically can offer a competitive investment management fee. Not only do clients get a higher level of service and competency, it also costs less.
Many see the re-emergence of the boutique investment firm as part of a natural progression. As we exit this recession, the Feds are realizing that mega financial institutions are not sustainable nor are they necessarily in the best interests of society. Nimble, focused, high touch firms are the bedrock of capital formation and not ‘too big to fail’ financial institutions.
Jeff Kaminker is a licensed Commodity and Derivatives Trader. He is President of Frontwater Capital works with a number of Fortune 500 companies providing commodity risk management services.
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