The late Harvard Business School professor Clayton Christensen found that in many sectors, low-end disruptors typically take hold at the bottom of the market and then work up to satisfy more demanding market segments. That very phenomenon is happening in the investment management industry. The industry is now showing the traditional earmarks of a sector ripe for disruption — most obviously, unhappy customers and very profitable incumbents.
In order to understand the next wave of disrupters, we use professor Christensen’s formal Disruptive Innovation framework. He popularized the idea of analyzing a company by looking at the “jobs to be done” its clients needed. Most money managers think their main job is generating alpha, but they are wrong. According to Amanda Tepper, CEO of Chestnut Advisory Group, investment performance alone does not drive asset flows.
We summarize below all of the jobs to be done by an investment manager in each category, across technical, functional, and emotional benefits. For example, Vanguard Group delivers not only the technical and functional benefits of low-cost investing, but ladders that into the emotional benefit of trust, of putting clients first and not making an excessive profit.
The hierarchy of jobs to be done by investment managers
Technical: What the product/experience does/is — “the offer”
- Investment strategy: Generate alpha; don’t lose (too much) money; match liabilities and obligations; minimize expenses, and taxes; exposure to targeted sectors; legacy/achieve political or social goals; and protection from tail risks.
- Execute investments: Source/generate investment ideas; research/due diligence; make investment decisions; manage portfolio and exit.
- Administer investments: Administration; build optionality; compliance with the law and religion; and transfer wealth to heirs.
Functional: What the product/experience provides to the client — “the execution”
- Easy and convenient user interface; customer service; access to networks; education; self-discipline.
Emotional: How the product/experience makes the client feel — “the tone”
- Peace of mind; social validation; exclusivity; control; excitement.
Technical jobs to be done
A money manager must do all of the technical jobs at an acceptable level just to get in the game. We’ve listed below the major technical jobs, in roughly descending level of importance. We break these into three subcategories: (a) investment strategy; (b) execute investments; (c) administer investments.
Investment strategy
Generate alpha
Some investors look to optimize for the highest returns above all other goals. They can typically tolerate extended volatility.
Investors focused on returns may want to invest in the most nascent of asset classes, which historically have generated astronomical returns for early investors. Historical examples include art, carbon credits, collectibles, cryptocurrencies, frequent flyer miles, internet domain names, lifetime individual income, litigation finance, mineral rights, patents, receivables, SaaS company recurring revenue, non-fungible tokens (NFTs), social media accounts, FBA third-party sellers on Amazon and other virtual currencies such as video game currencies.
These asset classes usually lack liquidity, legal protection, credibility among professional investors and indices, and they’re extremely high risk. However, as they develop, these asset classes accrete more of the infrastructure of the larger, established asset classes.
Similarly, angel investing is the highest-returning asset class we’re aware of, with median returns of 18% to 54% across 12 academic studies. However, angel investing has a long duration, extreme dispersion, high time requirements and poor visibility.
Don’t lose (too much) money
People hate to lose money more than they care about making money. The clearest example of serving this need are specialists in structured products, e.g., Axio Financial. Halo is a two-sided marketplace connecting investors to structured products offered by leading global financial institutions, easing access to these instruments.
Match liabilities and obligations
Pension funds are the best example of investors who do not prioritize getting the highest return possible but want assurance that they can meet their financial obligations on time. Even a family office that may not have a legal obligation to pay pensions does need to plan ahead for when they’ll get cash from the other side of their illiquid investments.
The universal liability is inflation. Inflation-linked bonds are an innovative tool to address this liability, alongside traditional inflation hedges such as real estate and commodities. In some markets used to high inflation, such as China and India, money molders choose to invest a significant portion of their wealth into gold.