Growth through Standardized Customization — an Interview with Helmut Paulus
A customer can order a new car with whatever engine they want. They can choose the exact shade of red body paint. They can individualize all the details (upgrade the sound system, add leather trim, install racing seats, etc.) and yet it's not impossible for the manufacturer to deliver exactly what the customer wants. And they can do this, thousands of times, with little to no disruption to their process. The same needs to be true in asset management. If you aren't able to deliver a highly customized product at scale, you'll have a serious problem in convincing your clients that you're worth the cost.
Given a blank slate, no individual institutional investor would ask for the exact same solution as another. But creating 100 percent custom solutions for every client is nigh impossible for institutions. So don't make it custom; make it customizable. We interviewed Helmut Paulus, CEO of Quoniam Asset Management, to get his take on how standardized customization makes growth at scale possible.
How would you define standardized customization?
From my point of view, standardized customization is all about creating an efficient production infrastructure for portfolio construction and trading. The traditional "handcrafted solutions" are too expensive and the scalability is too limited to service the majority of institutional clients. Standardized customization delivers an investment solution to institutional clients that is highly customized to their specific needs, fulfills the agreed risk/return expectations and last, but not least, is available for a competitive fee.
How can an institution avoid being caught up in the details of an individual customization project?
You have to identify the topics that make your process scalable and customizable — it's not just "customized reporting." The investment production process has to be re-engineered with lessons learned from the car manufacturing industry. Straight-through processing of data and assets in our industry—similar to the glass, plastic and metal in the line production of cars—is crucial. The implementation should be highly automated, enforcing a provable and reliable best execution of all trades. Human beings should always oversee the quality of the process and, if necessary, manually take over critical steps of the automated process.
What are the advantages and disadvantages of larger institutions as they try to deliver custom solutions? What are the advantages and disadvantages for a startup working on the same problem?
Again, this is very similar to the automotive industry. If a company has focused for decades on combustion engines, it's a challenge to quickly convert its skills and production line to electric cars. This is why more nimble companies can be successful. Based on a combination of agile skills, a scalable production platform and reliable performance in the field of systematic investing, smaller institutions have the potential to disrupt the business model of larger institutions. Larger institutions typically have the budgets for painful conversion projects, but for economic reasons they tend to sell old technology as long as possible.
The industry has to re-engineer the investment production process.
The industry is probably facing a significant reallocation of assets. Driving this trend are fee squeezes (fed by low interest rates), knowledge of the latest technology (Big Data, machine learning, artificial intelligence), and the limited added value delivered by traditional asset management companies. Expected performance for a reasonable price was one of the key objectives for Henry Ford more than 100 years ago, and we see how that industry has evolved since the Model T.
How much "custom" can the market really handle?
Specific individual solutions are crucial; however the variety of needed features is limited. It is possible to handle "custom" requests if you have a production platform that is capable of incorporating these different requirements. But it's not only about automating or customizing reports – it's about customization at the core of the asset management business: portfolio construction and forecasting.
Ultimately, the degree of customization will be determined by the market and will adjust to what investors ask for – asset-prices, liquidity, transaction costs and management fees will regulate the changing demand.
What makes customization such a powerful selling point? Isn’t "close enough" good enough, especially when looking at pricing options?
A customized solution reflecting the client's needs, at a reasonable price, is always a good starting point for a scalable production platform and business model. The unavoidable imperative to use modern technology in all production sectors of asset management will force a significant change in our industry. Think about the automotive industry — we are used to an outstanding high level of reliability. Below average or "close enough" will be out of business in the long run.
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