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Multi-Affiliate Managers:

Enabling Boutique Firms to Reach Their Full Potential

The data is in— according to a recent study1 measuring performance of different classes of asset managers over a period of 20 years, independent boutique managers outperform both passive indexing and non-boutique active asset managers. In the case of passive indexing, the outperformance is of magnitudes— nearly 3x, to be precise, across all 11 equity product categories with outperformance particularly elevated during periods of heightened volatility.

Likewise, the outperformance remains impressive when measured against non-boutique active managers. They trounce non-boutique actives across 10 out of 11 product categories. Boutiques also outperform non-boutique active managers in periods of greater volatility. It’s clear that this class of asset manager delivers investors more than their competitors and that investors are lucky to partner with them.

Given the highly volatile environment of the global economy at present, this is now more than ever the case. With rising inflation, geopolitical crisis in Eastern Europe, an unpredictable pandemic, and tightening interest rates, there has never been a better time to partner with investment managers that know how to steer ships through troubled waters.

How are boutiques defined? At Easterly, we utilize the following definition:

  1. The firm is focused on investment management
  2. Assets typically below $10 billion
  3. The investment managers have a specality focus
  4. The investment team is often multi-generational

We believe that the success of boutiques is due to their artisan-like mindset and approach. Small siloed teams that work together within a particular market, over a number of years, can craft specialty products with a deeper understanding of their niche than large bureaucratic firms with attention dispersed across every sector of the economy are able to grasp about their more generalist offerings. The level of focus and care that boutique specialization enables outpaces the generalized approach of non-boutique active managers. The results are clear.

Nonetheless, while the size and scale of boutique firms do enable a deeper understanding of their respective niches, they also face a number of operational and distribution challenges.

To use a metaphor, they are more skillful at racing a horse around a track but they do not necessarily have the fastest horses. The title “boutique” is suggestive of this. Scaling and efficiency challenges can create a number of headaches for this class of firm and their clients. It can prevent them from unlocking their full potential.

We believe that in order to overcome the challenges inherent in their smaller size and scale, boutique firms need partners. Further, they are best enabled in partnerships with multi-affiliate managers that are empathetic to their challenges and can enable them to access both markets and potential clients with the level of efficiency that larger firms take for granted. For boutique managers to be able to fully leverage the capabilities of their knowledge and specialization within their particularly personalized product universes, they need to be able to match the speed and capability of their competitors.

Fortunately, we understand that many of these challenges can be solved. Firms such as ours exist to solve them and to help boutique investors fully leverage their specialty knowledge. We have taken the time and care to identify this set of challenges and build a set of solutions that can help any boutique manager.

Partnered with an appropriate multi-affiliate, boutique managers can steer a horse more skillfully and with just as much horsepower as the fastest on the race course.

We’ve divided this set of challenges into two primary categories: distribution and operations.

Distribution Challenges:

Narrow Coverage

Boutique managers are usually faced with an uphill battle selling their services. Often, an unknown brand, too narrow of a product line and/or being faced with an out-of-favor market views can limit a boutique manager’s ability to get in front of their target audiences. Sales struggles such as these distract boutiques from the thing they need to focus on the most: investing. By joining a multi-affiliate manager’s platform, boutiques can immediately gain a sales organization and remain focused on what they do best. Partnership advantages are further multiplied when the scaling abilities of multi-affiliate platforms are taken into account— high quality multi-affiliates already have broad sales and marketing teams built to provide boutiques with the maximum amount of exposure to potential investors, scaled across many territories. Multi-affiliates have the ability to broaden coverage through cross-promotion of boutiques to potential LPs— presenting each potential investor with a menu of boutique affiliates that may best suit their needs.

For example, if a multi-affiliate manager is meeting with a pension fund that is seeking to invest in a trendy asset class, the multi-affiliate will be able to promote a portfolio of boutiques that may encompass both the desired asset class and other interests on the pension funds radar— interests that they hold but may not have been actively seeking. Boutiques featured on a multi-affiliate manager will gain access to an expansive list of leads that are warm, but not hot, through this expansion of coverage.

Limited Marketing Collateral and Difficult-to-Market Products

Multi-affiliate managers are also well-seasoned with respect to the art of attracting new investors. They devote an abundance of resources to story-telling and retain highly skilled sales teams. However, the highest quality multi-affiliates, such as Easterly, often have a simple explanation for their sales success: selecting the highest quality boutique-partners. Success sells. Multi-affiliates electing to be extremely selective in boutique selection also entails a boost to the brand of any boutique when they decide to join a multi-affiliate.

Marketing collateral remains an important piece of the puzzle, as well. It’s an asset, and it’s not easy to build. Developing thoughtful marketing programming, including branding, PR, events, perspectives, social media and email campaigns, requires time, resources, and alignment across an organization. It’s yet another area of competency that requires careful attention and allocation of energy— this is also time taken away from the critical work of crafting an excellent portfolio or investment strategy.

Boutique firms sometimes seek to work with agencies to develop content. This can be useful for the development of initial materials, or with respect to specialty products or situations. However, firms benefit the most if they can maintain a content pipeline that is consistent and self-aligned. This is best accomplished when partnering with a multi-affiliate that deeply understands their partner firm to a degree that agencies do not, and has plenty of marketing talent to leverage to create best-in-class collateral.

Further, some products are highly specialized and may require deep understanding of a particular market to fully apprehend. When trying to communicate the value of said products, it can be helpful to rely on experts that both understand the boutique firm and the fine art of simplifying and communicating complex ideas in a layman-investor friendly language. Multi-affiliate platforms that are accomplished at communicating a wide variety of complex product offerings can assist any partner firm and help them to reach a broader investor audience.

Best-in-class product can speak for itself— yet, expanded coverage, marketing collateral, well-practiced story craftsmanship, and a potential brand boost can definitely help.

Operational Challenges:

Heavy Investment in Infrastructure

In a fee compressed environment, focusing on efficiency of internal operations has become more prevalent to protect margins.  Boutique managers often suffer from under investment in technology and infrastructure, inflexible systems and unscalable workflows which can create bottlenecks and overreliance on manual processes. Many of these processes can be ameliorated or entirely automated with upgraded technologies. New technologies are not easy to implement, especially amidst the daily flurries of activity that demand attention elsewhere.

In the quest for cost effective and efficient operations, the Easterly model delivers boutiques economies of scale as a one-stop-shop for middle and back-office operations, technology, compliance, technology and human resources services. This centralized operations models alleviates boutique managers the drain on resources and capital, allowing them more time to focus on managing the portfolio and serving clients needs rather than typing up resources in operations, infrastructure and network management.  Partnering with the right multi-affiliate platforms with access to the best infrastructure and talent can help boutique firms execute at a speed and scale that can rival any larger firm.

Changing Market Requirements

 Expectations are constantly evolving from client’s preferences, technology advancement and regulatory requirements, it can be changing for boutique managers to keep pace. Understand the impact and implementing changes requires a high degree of flexibility, agility, and time.

From a technology standpoint, one well-executed cyberattack has the potential to severely impair the operations of any firm. Most firms have enough security to manage at present, but any could benefit from partnering with a trusted multi-affiliate such as Easterly that can provide high degrees of authentication, penetration testing, technical auditing, and other services that can help provide managers and their clients with a sense of comfort and safety.

From a compliance lens, boutiques may need to interact with many different agencies— FINRA, the FTC, the SEC, and others— who are continually changing or evolving the set of requirements firms must satisfy.  Partnering with a well-resourced multi-affiliate platform can help managers to be proactive rather than reactive in their approach to manage various stakeholders’ expectations.

Increased Importance of HR

A boutique is only as good as its talent, we understand the value of preserving the investment team and ensuring the team continues to have skin in the game. The Easterly multi-affiliate partnership model ensures boutiques retain a level of ownership in their business, which creates strong alignment on business goals and motivations for growth, which in turn attributes to lower turnover of senior talent.

To help further strengthen talent retention as well as bolster talent acquisition, Easterly’s model provides the option for HR support. Our full range of HR services include:

  • Talent Management
  • Hiring Processes
  • Performance Management
  • Benefits Programming
  • Employee Relations
  • Succession Planning

These services are all in place to help ensure our boutique partners have the tools and resources they need to effectively manage their most important asset: human capital.

Conclusion

While it’s clear that boutique firms are able to outcompete other classes of investment firm, a singular question remains for every asset manager— why not outperform even further? How can shortcomings be limited, and the opportunity for upside expanded? We believe that in partnering with multi-affiliate managers, boutiques can be empowered to spend less time on operational and distributional concerns, and more time on what they are the best in the world at— allocating capital. It is in the best interest of every boutique investor, and even the global economy, for fund managers to be able to focus on what is most important while performing at a speed and scale that can match any other class of investor.

 

[1] AMG, “Independent Boutique Active Managers Are Best Positioned to Navigate Market Volatility,”

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