The difference between investment acumen and business intelligence

Mergers and acquisitions (M&A) are often the result of companies needing to sell or merge to compete in a demanding marketplace. While we have witnessed successful ventures recently, there will be buyouts for less positive reasons.

There are two kinds of firms — incorporated companies, often referred to as micro or cottage businesses, and real businesses.

The latter have accumulated profits and allocated growth capital. This is not simply the result of business skill and acumen. Growing a company demands fiscal discipline. It can be a long and arduous road.

The Canadian wealth management industry is filled with small, medium and large firms. They range anywhere from $50 million to hundreds of billions in client assets.

We often associate investment acumen with business intelligence. Unfortunately, the two don’t necessarily coexist. What makes some stand out? Two critical ingredients.

1. The ability to amass/possess capital within retained earnings for business growth.
2. The singular desire and focus to grow a business, no matter the cost.

We see plenty of boutique firms operate for years and then flatline. It’s not poor investment performance that does them in. It’s their inability to invest capital for growth.

A lot of these firms are run by seasoned investment managers with no history in sales or marketing. They assume their track record will ensure success, but that’s seldom the case.

Many of these asset management veterans come from financial institutions that sell through financial advisors. Brand counts for a lot in that part of the business.

Private wealth managers are in a different business. Individual investors — particularly those with high levels of investable assets — are less impressed by brand than they are asset management strategies. Their focus is on individual portfolios or model pools, not the chief investment officer’s past performance at XYZ Mutual Funds Inc.

Earning business from these clients takes time, money and a whole lot of intestinal fortitude — something few portfolio managers are equipped with. At a bare minimum, a new venture takes three to five years to establish itself.

They don’t get sales

There are many reasons a new firm doesn’t make it to year six. Principal among them is a deficient, biased view of the sales profession.

Too few boutique firms are run by leaders who value sales professionals the way they do investment professionals. Some don’t even think they need a sales executive.

In a similar vein, firm owners are sometimes hesitant to allocate growth capital to sales. They’re not entrepreneurs at heart, and they don’t see the value in allocating risk to the business development process.

That’s especially true among asset managers with an insurance or mutual fund company background, where the sales team is organized separately from their investment colleagues. They’re used to the sales function being a firm expense, not one they had accountability for.

That separation limited their understanding of sales. Asset managers live in a siloed world of strategies, portfolios and positions — a world of numbers that fails to fully differentiate one firm from another.

It is ironic, given the patience required to spot great investment opportunities with the potential to generate returns over time, that so few asset managers extend the same courtesy to sales professionals. They’re unable to apply the same fundamentals to their very own business.

There are many examples of firms making these mistakes across Canada’s wealth management industry. Some of them will make news in the weeks and months ahead, not as successful M&A dealmakers, but as distressed businesses bought at a discount.