Help! We are not ready for the New Era. Data from London and Tokyo

FCG has started its “Mugs and T-shirt” world tour to present our new white paper, “The Investment Challenge.”  (Click white paper to read) We are very curious about how investment professionals (via local CFA societies) will respond to our message. First, do they agree that there is a severe challenge for “legacy firms” in the industry? So, we asked each room of attendees (about 30 in each city) to respond to the Casey Quirk quote:  “Legacy managers that refuse to change will, over time, see their business erode.” The results were clear. 90% of respondents agreed.[1] So, each room of investment professionals largely agreed that our industry faces significant challenges. Our white paper describes what we believe are solutions and includes a checklist to evaluate your firm. We used the voting results from the checklist as real-time data to evaluate the readiness of firms for the New Era. The topics below are presented from “Most ready” to “Least ready” based on the polling.

Firms feel most ready in the area of investment strategy. In response to the vote on:

Our investment team has a clearly defined edge and can execute on it. 64% of the audience agreed that their firms have such an edge.

You would hope so. Right? Nearly all the firms represented in both rooms were active managers, so they SHOULD have a clearly defined edge, or else—what?—they are just hoping to outperform?!  FCG is suspicious of the 64% because we work with teams weekly on this issue of investment philosophy/process and most do NOT have a clearly defined edge. (Most common answer: “we will outperform because we are smart and work hard.” Our response: show us the dumb, lazy teams!) Additionally, our research shows us that a big blindspot for investment leaders is their overconfidence around strategic thinking and planning. Hence, the voting seems to fall exactly into that pattern: overconfident about their firm’s investment strategy, i.e. their edge in the markets. So, ask yourself and your investment team, what IS our unique ability such that we can win? And don’t kid yourselves. Baron funds wrote a piece recently that highlighted their “secret” competitive advantage: 61% women in leadership roles. (Having just returned from engagements in which the teams were nearly ALL male, I think this “balanced” team of male and female may indeed be an advantage. It is clearly rare in the industry.) For more on this topic of creating a REAL advantage in your investment approach, see Michael Falk’s paper called, “Investment Beliefs: Separating the Real Stuff from the Fluff.” Real Stuff paper    (Note: Michael will speak on this topic at the CFA Annual in Frankfurt.)

We have an Executive Committee of six or less qualified members that leads our firm well. 43% agreed.

Interesting that less than half of the audience thought they were “well led.” And yet the number one “gap” value that we see in firms today is “Leadership development/mentoring.” Our culture surveys tell us that the staff sees little leadership development currently and wants much more of it. Further, our experience with investment firms indicates that the quickest way to build strong culture is to have a strong Executive Committee (Exco) that understands and practices the values of the firm. Far too many investment firms have Exco’s made up of very qualified technicians (investments, IT, finance, compliance, etc.) who are NOT qualified leaders. Closing this gap is a major challenge in the New Era.

Our culture is clearly defined. We can all communicate our stated values, and they are used to hire, coach and fire team members. 42% agree.

Understandably, the culture measurement is in line with the Exco result. Strong Exco = strong culture. No surprise then that the numbers are similar. Our working hypothesis would be that the same people who said, “we have a strong exco” also said, “we have a clearly defined culture.” Culture is important because it correlates highly with these two critical factors: 1) attracting/retaining top talent, 2) improved decision making. New Era leaders will need to have skills around culture because the challenge is getting harder. More younger people in the work force—a hedge fund we worked with recently has 50% Gen Yers—and more gender and racial diversity will require more savvy. (Current HBR magazine quotes Asian workers as saying that 90% of them feel misunderstood by Western bosses.) For more on building a strong culture see our white paper, “Linking Strong Culture to Success.” Strong Culture

Our firm has a plan in place for assessing, coaching and developing talent in the New Era. 30% agreed.

Now the weaknesses become more dramatic. Only 3 out of 10 respondents believe that their firm is properly developing talent. With the strongest request being: provide career paths for us. The younger workers have planted a flag in the ground on this topic: show us the steps in our career, or be ready to lose us! FCG’s Keith Robinson is busily addressing this issue with clients. For example, borrowing from the martial arts, he has developed a “belts” approach to being a research analyst. White belt is for rookies, then yellow belt, blue belt, etc. This approach allows staff members to experience progress in their careers even though their basic job function remains unchanged. Theresa Amabille at Harvard has written on the power of “progress” in motivating people, and it works! We all want to feel we are improving, so give us some “medals” as we advance. If you are still skeptical about the benefits of developing talent, read the piece by Citi Finance called “People Alpha” which shows that hedge funds who invest in developing their people outperform the ones that don’t! People Alpha

Our marketing and sales mindset has shifted from “friendly and responsive” to “challenging and teaching.” 30% agreed.

Also at 30% was the vote on shifting the sales approach. Research since 2008 indicates that the traditional methods of selling—becoming the “trusted advisor/great listener”—will not be sufficient in the New Era. FCG has met with many firms who are moving to the Challenger Sale, which means that sales people understand the prospect/client’s needs and have a hypothesis ready to address them. The goal of this sale is not to befriend the prospect/client (e.g. relieve their tension) but actually to challenge them around their investment approach in the New Era. Given that many clients are moving to passive solutions, it behooves firms to sharpen their selling edge. How do you distinguish yourself in this new, tougher environment, which Casey Quirk calls, “Life After Benchmarks.” I wrote more on this topic in my last LOL journal: Challenger Sale

Our senior team members know their strengths, weaknesses and blindspots via feedback from peers. 28% agree.

Because they are bright, many investment leaders do understand their strengths and weaknesses pretty well. So, the operative word in this question is “blindspots.” If someone asks you, “Do you know what your blindspots are?” don’t fall for this trick question by answering yes! The only way any of us knows our blindspots is via feedback. Which is why FCG recommends feedback-rich environments. Our 360 reviews of leaders indicate that MANY investment leaders have significant blindspots that are hurting their performance. The whole field of behavioral finance dives into this aspect of decision making. For example, nearly every leader we meet has a blindspot around “confirmation bias.” They form a hypothesis—Frank is a weak team player—then they look for data to make their case. Not very objective! We should all remember the wonderful example from Darwin in which he kept a journal dis-proving his hypotheses! Darwin’s approach gives us a chance to be even-minded about our views. So, ask yourself: who keeps me honest? Who gives me straight feedback? Believe me, the higher you rise in a firm, the less likely you are to get straight feedback. Good CEOs keep a constant vigil of seeking honest feedback and appreciating all those who are willing to give it. Is the absence of reliable feedback a blindspot for you? J

We have a merit-based succession process for key positions. Only 23% agreed.

Investments is a talent business, right? So, shouldn’t promoting the right leaders be crucial for investment firms? If the wrong people are promoted then the talent won’t be optimized. FCG sees this continually. The Peter Principle is alive and well in the asset management business. A great PM gets promoted to CIO. And the talent races for the exits. FCG occasionally finds a CIO who admits, “I’m not the best investor in this organization, but I know how to lead quirky investment types.” (For more on the specifics of leading quirky people, see my LOL journal: Leading Clever People ) FCG is so committed to talent and leadership that we completely revised the way that succession is done. Keith has a wonderful process that is participatory, merit-based, and transparent. If your firm is looking to promote a new CIO, then you start the process well in advance: 3-5 years. FCG’s process works like this. Key opinion leaders at the firm discuss the role and collectively define the competencies and skills that are necessary for success. The candidates for the role are peer-reviewed based on these skillsets. In every case so far, the proper person emerges from the process as the logical successor. And all the other team members see the fairness of it because they were PART of the process. FCG’s goal for succession: the right person gets the job, and none of the other talent leaves when it is decided.

We have shifted our mindset from “comp” to “rewards.” Our rewards system is fair, transparent and simple. Only 20% agreed.

And bringing up the rear is comp! What a shocker.  FCG would agree with the voting results: comp is done poorly in our industry. In the first place, we train people to focus on comp and then complain when they do! A research study was done with children and reading habits. The researchers paid some children to read and encouraged a control group to read without monetary rewards. The study showed that both groups read during the trial period at about the same clip. But when the study ended, the paid readers stopped reading. They had been taught: reading is a paid activity. If no one pays you, don’t read! The control group continued to read because they associated pleasure with reading good books. The investment industry has trained their employees to be extrinsically motivated (by money) rather than intrinsically motivated (by having passion for their work). Smart firms hire people who love the investment work—many would do it for free—and then use a blend of rewards (i.e. flexible working hours, career development plans, mentoring/learning, etc.) to motivate and retain top people. Importantly, FCG recognizes that fairness is hugely important to comp. Investment professionals value meritocracy and want to be paid fairly. And the way to make sure this happens is to include them in the process. All of FCG’s comp work is participatory: the people being rewarded are part of the design. The logic here is so simple: if you let the staff help design the reward system, then they can’t complain about it afterwards! When we explain our process to CEOs, we sometimes hear, “hey wait a minute, you’re letting the inmates run the prison!” And our response: if that’s how you view your talented staff, then you have a more fundamental problem than comp! If you’ve hired the right people—mature and trustworthy—then there should be no problem in including them in the design of their comp. For more on FCG’s approach, see Keith’s paper on comp: Comp: Getting it right

So, there you have it. Initial data on the state of firms in the New Era. And it’s not pretty. Investment firms will need to re-tool not only some of their products and solutions, but also the way they lead, develop talent and promote, build strategy and culture, and reward their people. In this regard, FCG has initiated an HR offsite for the purpose of discussing these issues more fully with the talent experts in each firm. On May 7-8, FCG will meet with HR leaders in Chicago so be sure to inform your talent officer.

Curiously yours,


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[1] FCG used a Likert scale from strongly agree to strongly disagree for the voting. Results from each city were roughly the same. For simplicity, we lumped “strongly agee” and “agree” together to equal “agree” and all other responses—neutral, disagree, strongly disagree—to mean “disagree”.

Selling in the New Era

FCG has launched its “Mugs and T-shirts World Tour” in earnest. We presented our new white paper to several firms in San Fran, this past week to several more firms in London and their CFA Society. Next week we will pass out mugs and T-shirts in Tokyo to their CFA Society. Presentations for many major city CFA Societies are lined up, so if you would like us to visit one-on-one with your firm, just let Liz know. ( We’d love to meet separately when we’re in your neighborhood.  (The paper is available on our website: “The Investment Challenge: Remaining Relevant through Compelling Value.”)

Surprisingly, the section of the paper that has gotten a lot of attention is the section on selling in the new era. In fact, one of the San Fran firms wanted us to address that topic exclusively (they have mastered all the other topics: leadership, culture, strategy, comp, succession and talent. J) The firm in question is already working hard to develop a program for all their sales people on “challenger selling.” Many asset management firms are doing the same. So, let me explain a bit more about this approach to selling, going beyond what we discuss in the white paper.

To summarize the challenger approach: traditional selling is relationship based, aiming to build a trusting and comfortable relationship with the buyer/client, while challenger selling aims at going beyond the comfort goal and creating a healthy tension with buyers/clients by providing them new insights about their business. Another way to think of challenger selling is that instead of asking “what keeps you up at night?” the sales person goes in with a well-reasoned hypothesis about the industry and common problems, then provides insights and solutions that are tailored to the buyers/clients. The goal of the challenger discussion is to get a reaction from the client of “Gee, that’s interesting. I hadn’t thought of that.” One way to think of this is that challenger sellers are more interested in being memorable rather than agreeable.

The road map for achieving this outcome is as follows:

The success of this approach depends on several of your firm’s tribes working closely together. So, if your firm is troubled by tribal warfare, you’ll have more difficulty implementing this approach. Specifically, marketing, sales, and investments all have to collaborate to develop insights that form a “hypothesis.” For example, in our white paper we talk about Casey Quirk’s piece, “Life After Benchmarks.” So, your firm could brainstorm what products and solutions do you offer that go beyond the traditional benchmarks and actually address client needs? (For more on this, see our white paper or CQ’s piece.)

To give readers a feel for how this approach could work, I will use FCG as an example.

  1. Warmer: in the “warmer phase” we ask, what is a common problem that all investment firms face? For us, the answer is talent. Investment firms depend on strong talent to win in the markets. Losing good talent is a major problem for firms. The best firms are able to attract and retain good people. Many firms that lose talent are blindsided. They don’t see it coming. Or, they see signs of a problem but they wait too long to deal with them. They only react when they are in crisis.
  2. Reframe: investment firms will all agree that talent is crucial to success, so nothing new has been introduced at this point. The reframe is: early diagnosis is the key to talent retention. As in medicine, finding problems early make all the difference. That is why people have annual check-ups. The reframe for investment firms is: don’t be reactive (waiting until there is a crisis), rather be proactive (catching any issues early and dealing with them). Get an annual check-up.
  3. Rational drowning: this step involves facts and data. FCG can present numerous cases of firms that ignored their talent issues and suffered huge setbacks as a result. My personal favorite is a hedge fund, in which the CEO of the parent company asked the two leaders of the hedge fund to meet with FCG to learn more about our services. The CEO had a hunch that the leaders of the hedge fund might be dealing with some personal issues that were going untreated. During the FCG presentation, the two hedge fund leaders busily worked their smart phones and rarely looked up at us. Eventually, I said, “of course, some people don’t think culture is important to investment firm success.” Both of the hedge fund leaders, still looking down at their devices, put their hands in the air signifying, “that would be us!” The CEO and I smiled at one another and realized that the pitch was going nowhere. The outcome? Within a year, the hedge fund collapsed because the two leaders got into a power struggle that couldn’t be resolved. FCG has countless stories like this.
  4. Emotional Impact: the goal of step 4 is to take the buyer/client from “interesting, but that doesn’t really apply to us” to “wow, that could happen to us.” The stories that are useful here are the ones that FCG has seen with clients in which they were completely blindsided by the loss of key talent. And there are many. We well remember congratulating a CEO about the recent successes that his firm had enjoyed only to learn that a week later his crown jewel investment team was lifted out by another firm. In another case, the CEO was aware that his lead PM was unhappy about current circumstances but assumed that the trouble would blow over. Within a few weeks, the lead PM was lifted out with nearly all of the team. The two firms in question are still battling it out in the courts. A very recent situation involved a younger team of small cap managers who believed they should be given more freedom to run their product in their own way. About 8 months after the trouble started, FCG was called in to help patch up the situation. By then, the younger investment professionals were beyond redemption: they wanted out. The situation had gotten too toxic in their view and they wanted a fresh start. In all of these cases, there was a point in time when the teams were performing well and the firm leaders assumed that it would continue indefinitely. In fact, the trouble was already brewing, yet the CEOs were still blindsided.
  5. A New Way: here is where the seller introduces a solution. In this case, not FCG’s specific solution, but a general solution. In medical terms, the case for early diagnosis and treatment. Firms that conscientiously review their talent and comp each year and check in with key personnel are far better off than the ones that assume everything is fine. The best practice that offers a solution is to be proactive around talent. Typically, if a problem is brewing, a third party will have better access to it than the leaders who have created it.
  6. Your solution: this is the final step in which you show the buyer/client that your solution is better able to address the problem than anyone else. Notice, you wait until step 6 to trot out your company’s offering. FCG has several proven diagnostics that allow for early detection of problems with a firm’s talent. Through surveys and interviews, FCG can deliver a “health report” on the various teams and key opinion leaders in the firm. If the “health report” is fine, great! If not, you have a much chance of treating the problem because you’ve discovered it early.

The authors of the Challenger Sale summarize this 6-step process as follows: you’ve taught the client something new and valuable about their business (which is what they were looking for from the conversation), in a way that specifically leads them to value your capabilities over those of the competition (which is what you were looking for from the conversation.)

I find this approach intriguing. In our case at FCG, we can offer many different hypotheses, not just this one about losing key talent. For example, what about Red X’s? (Red X’s are the brilliant but difficult stars that populate the investment industry. See our paper on the website for more.) Early diagnosis of Red X’s can also be invaluable. Many firms hang on to Red X’s because they do deliver incredible value. But at what cost? We know a PM who has created a brilliant track record in long-only equity portfolios, but has turned over the analyst staff 200% in two years and even more in a few targeted sectors! No one can work with him. The environment is so toxic under his leadership that many analysts leave without new jobs lined up. Early diagnosis in this case would allow for installing a co-PM (they have such a talented person on staff), which then allows senior management to tell the toxic PM: shape up or we’ll move you out. Or another toxic Red X who was the CIO. He was deemed too valuable to fire because the firm would lose many clients. Well, they ended up losing clients anyway because the two most talented PM’s left, went across the street, started their own firm and took the half the clients with them. All because the CIO was a jerk. In both cases, early detection and treatment would have greatly benefitted the firms in question.

So now that you get the hang of this, how does it work for your firm? What is a hypothesis you could put forward to challenge your buyers/clients? If you are a single product, long-only, active equity manager, what could you say to clients? Here’s one thought. Assuming you have identified the edge that you have in the markets—and hopefully you have, or else that is your first piece of business!—then you could state that as an industry condition all buyers/clients are facing the same problem: finding consistent alpha producers. After you’ve “warmed up” the buyer/client with an awareness that alpha is hard to find on a consistent basis, you then provide a reframe: no firm will find alpha if they are battling short-termism. If the asset manager is publicly traded or owned by a parent company who insists on quarterly results, then—you could argue—they are doomed to mediocrity (or worse). Your firm’s pitch might be: we are independent, so we can truly take a long term perspective. This long term orientation allows us to produce alpha consistently over a cycle.  This is the pitch that one of our successful clients uses with good results.

Or consider a multi-product firm that can offer more sophisticated solutions. They can warm up the buyer/client with a statement about the new demand for complete solutions rather than single products. The reframe can be: in the past, providers aimed at beating benchmarks, whereas we embrace the new approach that YOU are the benchmark. So, we’ll design a customized approach based on your specific needs (think goals—future liabilities-based) and create your solution with our products, or at least those that fit. Again, we know a client who is offering this reframe and using the challenger approach with good success.

As one who loves thought leadership, I find this whole challenger approach fascinating. What is your hypothesis? What is your reframe? What is the unique insight that you are offering? Regardless of whether or not you adopt the whole challenger sales approach, you can certainly play with these questions. A recent Greenwich survey indicates that 56% of the drivers of relationship quality are service, NOT investments. Our experience supports this finding: the New Era in investments is about both client service and investment performance. Finding new and better ways to interact with clients is crucial to success going forward. As always, give us a call if you wish to discuss these ideas further.

Meantime, look for us to be in your city soon on the “mugs and T-shirt” tour, as we discuss the new white paper. (Oh, and just to be clear: we don’t actually have mugs and T-shirts, so we’ll save you the trouble of contacting Liz to get them! J)

Curiously yours,


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