What Are the “Jobs To Be Done” of an Investment Manager?

Most money managers think their main job is generating alpha, but they are wrong. We discuss the real “job to be done” of an investment manager.

If you ever studied disruptive innovation formally, you know the pattern. In many industries, low-end disruptors take hold at the bottom of the market and then work up to satisfy more demanding market segments, a pattern famously identified by the late Harvard Business School professor Clayton Christensen. Think of personal computers, which started as toys for hobbyists and were dismissed by the dominant mainframe and minicomputer companies of the day. Similarly, the Big Three US automakers dismissed the early small, tinny, and uncomfortable imports from Japan.

The same phenomenon is happening to our industry, investment management. Investment management shows the traditional earmarks of an industry ripe for disruption — most obviously, unhappy customers and very profitable incumbents. Average fees are degrading steadily, particularly given the move towards passive management. According to the Investment Company Fact Book, 8% of mutual funds and ETFs were in indices in 2000; 20 years later, over one-quarter of mutual funds and ETFs are in indices. Prominent examples of disrupters in investment management include index funds (Vanguard); ETFs (iShares); cryptocurrencies; the original discount brokerages (Schwab, Interactive Brokers); online wealth management (Nutmeg, Betterment, Wealthfront); and gamified investment brokerages (Robinhood).

So who’s going to disrupt today’s leading investment managers?

In order to understand the next wave of disrupters, we use Prof. Christensen’s formal Disruptive Innovation framework: “an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.”

Asset management is about to go through a particularly dramatic period of disruption driven by both internal and external forces. The industry is extremely profitable: according to BCG, the total industry AUM as of 2020 was $103 trillion, with notably high operating margins of 34%. But, the external environment is changing rapidly. Venture capitalists’ investment in disruptive financial technology companies has consequently exploded.

Traditionally, asset management changes slowly. Of the $360.6 trillion of investable assets globally, approximately 64% (~$230 trillion) is invested in real estate and cash — which were also the most popular asset classes in the 1800s. The next most popular asset classes are insurance and treasury bonds, which were disruptors in the 1600s. In 2020, only 15% of investable assets is in alternative asset classes including hedge funds, private equity, and venture capital, according to BCG.

In this essay, we explore customization through Dr. Christensen’s “Jobs to be Done” framework, and discuss some of the disruptive companies building new business models around those jobs, which aspire to eat the lunch of today’s industry behemoths.

Professor Clayton Christensen popularized the idea of analyzing a company by looking at the “Jobs to Be Done” needed by its clients. Most money managers think their main job is generating alpha, but they are wrong. According to Amanda Tepper, CEO of Chestnut Advisory Group, “Contrary to conventional wisdom, investment performance alone does not drive asset flows. While there is a clear relationship between the two, investment performance accounts for only about 15% of the reason for placing money with managers. We found correlations between trailing three-year returns (the primary metric most institutional investors follow) and subsequent one-year net capital inflows ranging from only 0.24 among small and mid-cap equity managers to just 0.04 for Global Fixed Income managers.”

Managers still have to cover the basics like meeting return expectations at the right risk levels with the proper internal controls (the technical job to be done). The true opportunity set for disruption, however, lies in customization and in serving all of the other needs that a Money Holder has.

In the graphic below, we summarize all of the jobs to be done in each category, across technical, functional, and emotional benefits. Tom Bartman, formerly Senior Researcher, Forum for Growth and Innovation, Harvard Business School, observes that the “Jobs to Be Done” …

“builds like a pyramid. First, you must deliver the functional Job; if you don’t your customer has no reason to hire you. Once you’ve delivered the functional Job, competition arises at the experience/social level. Finally, once you’ve delivered the experiences your customer prefers in the circumstance in which you’re targeting, you need to integrate all of them to fulfill what [we] call the emotional aspect. From that, you can build a purpose brand.”

As an example, Vanguard delivers not only the technical and functional benefits of low-cost investing, but ladders that into an emotional benefit of trust, of putting clients first, and not making an excessive profit. Trilliam Jeong, CEO of Wealthblock.ai, observes that the, “Emotional benefits of investors are mostly missing in managers’ service offerings, as most of the managers come from a finance background….The [investor managers] who can also provide emotional benefits will stand out.”

Money Holders can modularize and distribute all of the jobs we describe through their own employees and/or through fund managers whom they “hire” through some level of LP commitment. Winter Mead, CEO of Oper8r, a venture capital fund accelerator, observes, “Perhaps the strongest validation of this thesis is the fact that many of the leading established VCs invest into emerging VCs in order to generate early-stage deal flow”, i.e., to help them get the job done of sourcing new investment opportunities.

I. 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 3 subcategories: a) investment strategy; b) execute investments; c) administer investments.

a) Technical Jobs to be Done: Investment Strategy

Generate alpha. Some investors look to optimize for the highest returns above all other goals. These are typically ultra-high net worth individuals or sovereign wealth funds that can tolerate extended volatility.

Investors focused on returns above all may want to invest in the most nascent of asset classes, which historically have generated some of the most astronomical returns for early investors. Recent 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. In their early years, these emerging asset classes usually lack liquidity, legal protection, credibility among professional investors, and indices. And of course, they’re extremely high risk. However, as they developed, 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.

The steady recent growth of the well-established “alternative” investment categories (private equity, VC, hedge funds) reflects Money Holders’ desire for new options; see chart below.

Allocations to Alternatives Continue to Rise

Sources: BCG Global Asset Management Market Sizing Database 2020; BCG Global Asset Management Benchmarking 2020; Strategic Insight; P&I; ICI; Preqin; HFR; BlackRock ETP report; IMA; BCG analysis. Note: Bar chart values may not add up to 100% because of rounding. REIT = real estate investment trust. 1 Includes absolute return, long/short, market-neutral, volatility, and trading mutual funds. 2 Includes hedge fund of funds; revenues exclude performance-based fees. 3 Includes private equity fund of funds; revenues exclude performance-based fees.

Don’t lose (too much) money. As Professor Daniel Kahneman documents in Thinking Fast and Slow, people hate to lose money more than they care about making money. Even aside from the emotional component, some institutional investors and many individuals (e.g., those close to retirement) have a structural imperative to hate losses more than they value gains. Sophisticated Money Holders understand that sometimes they are going to lose money. However, they expect Money Managers to have clear reasons and to perform within the expectations of their investment strategy, as well as to make money overall over time. Smart Money Managers address this need by focusing on risk-adjusted return offerings and articulating the tradeoff between risk and returns.

The clearest example of this service 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. Bridgewater’s Pure Alpha strategies allow investors to select different volatility levels based on their risk preference.

An example of a vulnerable category of funds that does not do this job well, despite promises to the contrary: Highly leveraged, high volatility, high concentration hedge funds, which cannot withstand withdrawals during significant down years. The average lifespan of a hedge fund is 5 years; within a three-year period, about one-third of hedge funds disappear.

An example of a product that provides downside protection for investors both in times of volatility and market sell-off (i.e., a “risk-off” environment) and in times of continuous market stimulus is real asset-backed bonds. These structured finance products provide downside protection because they are typically backed by gold, silver, real estate, and other real assets, and also provide a predictable yield for investors through their coupon structure.

Match liabilities and obligations. Pension funds are the best example of investors who do not prioritize getting the highest return possible per se 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 out the other side of their illiquid investments. If you invest in dividend funds, utilities, bonds, or many types of rental real estate, you know with relatively high confidence that you will get predictable incoming cash payments.

The universal liability is inflation. Inflation-linked (“IL”) 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 Holders choose to put a significant portion of their wealth into gold. The demand for gold in India and China is also driven by the emotional jobs they address of providing peace of mind, not to mention aesthetic value.

Individually, the main liability that people are concerned about is their lifestyle: mortgage, food, etc. People want to know they have enough cash to cover many months (preferably years) of their ongoing living expenses, even if their liquid investments tank and their illiquid investments are locked up. According to the 2020 Capgemini World Wealth Report, the average HNW household keeps 25.2% of its assets in cash, much of which may be mostly outside of their investment portfolio. Such large cash holdings may represent a drag on overall returns, but if that level of liquidity enables investors to psychologically withstand market volatility and therefore not sell when the market dips, then the cash plays an important psychological role.

Minimize expenses. Vanguard is the role model and king of the low expense Money Manager industry, both because of their focus on indices that require minimal research, and their highly unusual status as a Money Manager which is owned by its own funds. That said, there is room for new businesses that shed light on the true costs and expenses of fund management. While hedge and private equity funds typically report management fees and performance fees, there is little transparency around other fees charged to funds such as legal, compliance, entertainment, custodian, and even middle office, which can add up to 100 basis points. Companies such as Addepar, Novus, and Vitrio help aggregate and expose the costs embedded in a fund as part of holistic portfolio governance. Novarca helps institutional asset owners to identify unnecessary expenses and cut costs to enhance returns.

Even low-cost retail advisors like Charles Schwab, Fidelity, Morgan Stanley, and Vanguard are not immune to pressure from the yet lower cost robo-advisors, which is why they have become active acquirers in this space. Meanwhile, Alibaba and other social media giants are busily expanding into the investment management business. Alibaba amassed an astounding $185 billion in assets under management in just two years from entering the asset management business. There are however challenges as regulatory agencies have not developed the right infrastructure and rule to oversee new types of technology-driven asset managers.

Minimize taxes. Poorly managed taxes and transaction costs can kill investment returns. As one form of protection, robo-advisors provide automatic tax-loss harvesting to help investors minimize taxes. Donor-advised funds, popularized by VC-backed startups like Daffy, allow investors to both directly support select non-profit causes and take advantage of the tax benefits usually enjoyed by foundations and endowments.

Betterment faces the interesting challenge of balancing giving the customer unlimited decision-making power, while at the same time helping minimize tax losses. Part of their solution: make graphically clear the tax implications of any trade you make on their system. They have found that explicitly publicizing the immediate cash cost of selling a losing position helps deter users from executing and therefore concretizing a tax loss.

Life insurance is a tax-protected way to protect your heirs’ interests. Puerto Rico marketed its bonds as “triple tax-free” (exempt from federal, state, and local income taxes), which made them very attractive, for a while.

An emerging manager, Greenline Partners, offers a risk-parity model not common among money managers serving institutions. The Greenline solution focuses on tax minimization by understanding the long term impact of deferring taxes and overlaid with a unique tax-loss harvesting methodology.

Another example of an extremely tax-preferred asset class is early-stage venture capital. The best-case tax scenario for most US asset classes is long-term capital gains of 15-20%, plus 3.8% Medicare tax, and the gains count towards Alternative Minimum Tax (“AMT”). In contrast, early-stage venture capital gains if optimized for Qualifying Small Business Stock (QSBS) gains are tax-free federally, and in 45 of 50 states. They are also excluded from 3.8% Medicare tax and from AMT adjustment. Most losses are expected to be deductible against income.

Exposure to targeted sectors. Money Holders often seek to invest in certain targeted sectors both for strategic reasons and sometimes for risk-hedging reasons. This drives the development of highly targeted funds with tightly defined target sector exposure. A common example: exposure to markets that are hard to trade, such as frontier markets, e.g., Shehzad Janab’s Daman Investments hedge fund provides access to the UAE market. Republic expedites access to private companies and funds that are typically hard to access.

Kunal Shah, Managing Director and Head of Private Equity Solutions at iCapital Network, says, “It’s been well-documented that the public markets are shrinking and most real growth is occurring in the private markets.” This pushes investors who historically were not comfortable with the opacity and illiquidity of the private markets to reconsider their exposure. A number of platforms have emerged to make the assortative mating dance between limited partners and general partners more efficient. This helps Money Holders identify specialty funds that can address their very specific needs, no matter how niche. Allocate and iCapital Network help retail LPs identify the right alternative managers. CEPRES, Palico, and Trusted Insight provide similar services for institutional LPs.

Legacy/achieve political or social goals. According to JP Morgan Chase, the percentage of both retail and institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolio jumped from 45% to 75% in 3 years. Investors increasingly seek to put their money where their heart is – whether it is based on social consciousness, religious views, or a hobby. According to Patrice Viot Coster, COO of AXA Investment Managers Research: “People may want to express openly who they are through their investments: I am what I invest.” We do not mean the philanthropic activities of hedge fund billionaires, but the general desire of the average investor to positively impact the world through their investments. Millennials and women — both growing forces in the pool of Money Holders — are more likely than their past generations and men in general to value doing good in addition to doing well.

According to Cambridge Associates, private impact investment funds – specifically private equity and venture capital funds – that pursue social impact objectives have recorded financial returns in line with a comparative universe of funds that only pursue financial returns.

Generation Investment Management (co-founded by former Vice President Al Gore) has over $7B under management, and differentiates from competition largely based on their focus on “sustainability research”. Social impact or “green” bonds offer a creative way for investors to invest in companies offering returns linked to achieving certain defined social impacts. Ethic is a “tech-driven asset manager which powers the creation of sustainable investment portfolios. We build separately managed accounts (SMAs) optimized to track the market, align with one’s investment allocation, and outperform on a client’s chosen sustainability criteria.”

Protection from tail risks. A non-trivial percentage of investors want to protect themselves in the event of major economic dislocation. They might invest in a backup luxury second home, ideally in a stable country like Canada or New Zealand. Portable wealth (gold, jewelry, diamonds) allows you to cross borders easily in the event of social turmoil. Certain local businesses (e.g., a restaurant or farm) can provide income even in the midst of turmoil. Some Mormons keep a twelve-month supply of food and essentials in their basement as insurance.

We are not aware of a financial product offering that addresses this unique need more systematically. Catastrophe insurance (e.g., flood insurance) provides protection against narrowly defined protections. However, in a tail risk scenario, The End of the World As We Know It, traditional financial services providers will probably not be reliable. An example of a company addressing this need is Praedicat, which improves the underwriting and management of liability catastrophe risk. PreData offers predictive analytics for geopolitical risk.

Marto Research has been a strong proponent of gold as both a tail risk protection asset and as an asset that outperforms other assets in an environment of the excessive stimulus. Gold has indeed outperformed both equities and bonds for the last five years and Marto predicts that gold will continue to outperform in the next decade.

Source: Marto Research

b) Technical Job to be Done: Execute Investments

The essence of investing is to make wise investment decisions. We break this into 5 jobs to be done:

Source/generate investment ideas, usually via social networks and research
Research/due diligence to validate key assumptions
Make investment decisions, including a financial model with sensitivity analysis, that tells the story you need to believe and reviews risks/mitigants vs. upside potential
Manage portfolio
Exit

Source/generate investment ideas. Some investors are monitoring social media to identify new investment themes, e.g., with ExplodingTopics. Public market investors can participate in any of the numerous vibrant online communities (e.g., SumZero, Seeking Alpha, The Motley Fool) to identify new ideas. Similarly, Republic offers people the chance to invest directly in private tech companies. Axial and Intralinks Deal Nexus make the process of sourcing in the private mid-markets more transparent. For both origination and competitive due diligence, a host of data companies aspire to be the “Bloomberg of private companies”. We track a full list here.

One of the most creative approaches in this market: Sutton Place Strategies helps private equity investors identify the best-positioned intermediaries (investment banks) for a given strategy, by analyzing the activity of all of the small and medium banks in their coverage universe.

Research/due diligence. The typical white-collar worker spends several hours per day just looking up topics online. Typically the investment team assembles research in notes, file folders, and CRM systems, and sends hundreds of internal and external emails as they dig into a situation. Wonder provides outsourced research quickly, tapping a network of 6,000 analysts. ParagonIntel specializes in tracking the activities of the management teams of the “world’s most important companies”, in order to obtain early insight into problems, transitions, and other inflection points. Drop Technologies (Cardify) and Earnest Analytics tap alternative data sources for KPI tracking, position-sizing, prioritization, and idea generation.

Robo-advisors have lowered the cost and expanded the market for personal wealth management. However, they do not typically allow deeper analytical work on your portfolio, e.g., flagging the greatest potential risks or opportunities. Toggle delivers to retail investors basic quantitative AI-powered tools and services that have traditionally been the domain of large institutional incumbents. We spoke with one investor in Toggle who said, “We believe that Toggle will gain customers two ways: 1) from the high-end of the market, where many are currently being overserved, and 2) from successfully targeting non-consumption, thereby gaining new customers who historically were not using these tools leading to the creation of a new market. Toggle is deliberately not meant to replace Bloomberg or FactSet for the high-end institutional user and has the fraction of the features of those products. Toggle is also inferior to any custom built quantitative or algorithmic trading engine, but greatly simpler and easier to use.” This is a classic example of a company which is trying to build a disruptive model.

Make the investment decision. The decision is typically made in an investment committee meeting. Once the team has gathered the data, the team quantifies a few cases in a spreadsheet and writes a memo that captures the story and highlights opportunities, risks, and issues. This process works well if the research is solid; the team is disciplined, and decision-makers are strong…but that’s not always the case.

Bullet Point Network (BPN) has developed a patented software platform and process to help investors combine research management and scenario modeling to drive better decisions. BPN is able to build up to 100 scenarios for a company’s actual cash flows and assign appropriate probabilities to each key driver based on an investor’s logic and insight. BPN simulates all identifiable outcomes for the company’s future cash flow and how its outlook impacts valuation. BPN can then allow investors to see their odds of losing money, achieving a 10x return, or anything in between, over different horizons. BPN has built interactive strategic models for hundreds of private companies for its venture capital and private equity clients. In a public example, BPN mapped out different possible outcomes for the COVID-19 pandemic and the consequent valuation outcomes for Planet Fitness, a fitness center operator.

Manage portfolio. Stratifi offers a low-cost, intuitive, and scalable portfolio hedging SaaS platform for investors, bringing the sophisticated risk toolkit of institutional investors to retail investors.

Accordion Partners offers Maestro, a technology platform designed to institutionalize a private equity firm’s unique approach to accelerating portfolio company value. According to Nick Leopard, cofounder, the major advantages of a systematic and documented approach to portfolio acceleration include:

Avoiding missed opportunities by systematically applying all a firm’s value levers to a company;
Saving time across the deal team by preserving associates from manually updating excel trackers assessing the portfolio;
Faster identification and remediation of talent gaps on the management team;
More effective board meetings and weekly/monthly calls to focus on solving issues at hand (that have now been already identified); and
Better responsiveness to LP questions in due diligence around the fund uniquely creates and tracks operational value-add.

Exit. A range of companies are working to make the M&A process more transparent and less serendipity-driven for later-stage companies, including Axial, BankerBay, Intralinks Deal Nexus, Interexo, MergerMarket. EquityZen, SharesPost, and ZenPrivEx have specific initiatives to help employees and investors liquidate their positions in late-stage companies.

In 2020, SPAC volumes by value almost caught up with traditional IPOs in the US. SPACs offer private companies a faster path to liquidity than a traditional IPO and more visibility on valuation. They also potentially offer more risk, as most of these SPACs underperformed.

c) Technical Job to be Done: Administration

The last set of technical jobs to be done are administrative in nature:

Administration. Money Holders need detailed reporting, as close to real-time as possible. Addepar was founded to address this need, particularly for family offices that often have wildly heterogeneous portfolios with inconsistent reporting protocols. Carta helps companies and investors to manage their cap tables, valuations, investments, and equity plans.

As the Millennials begin to invest their own funds or become CIOs at asset allocators, they will expect the same “at your fingertips” accessibility to their portfolio that they now have from their Facebook account. Regulatory requirements and painful past experiences in money management (e.g., Madoff and other high profile frauds) increase the demand for transparency. This places a limit on the black box hedge fund model of “give me your money and wait for your annual report.”

Some money managers are beginning to adjust: ARK Invest offers several ETFs with near-real-time exposure of their individual trades. Goldman Sachs recently announced that it will share some of its secret trading sauce with its clients.

One of the current problems that institutional investors face is the lack of adequate transparency and control of all costs charged by the manager, well-dramatized by the Madoff fraud. According to the New York Times, “[…] a senior executive of the California Public Employees’ Retirement System, the country’s biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.” The investment agreements that institutional investors sign often give enormous leeway to managers to pass questionable costs on to their investors. The Carlyle Group passed on their limited partners the cost of a $115 million settlement of an insider trading lawsuit – which certainly looks like a failure of its own internal management. Scott Evans, former CIO of the New York City Retirement Systems, one of the largest public pension systems in the US, and other industry leaders are beginning to establish best practices around a revamped due-diligence and ongoing governance process to increase their insight and systematically build transparency in their investment programs. The opacity of these arrangements creates an opportunity for companies such as Vitrio and Novus, which provide technology platforms to institutional investors for systematic oversight of fund managers.

In our experience, operation and the post-trade processes are critical to the overall success of investment strategies. Often under-investment, legacy technologies, or mismanagement in operations can eat into the alpha generated by the investment decision-making process, or can blow the entire business up.

Build optionality. Warren Buffett and many others of the world’s greatest investors have earned disproportionate returns by being able to invest when the markets are panicking. Gary Zimmerman, CEO of MaxMyInterest, notes that Warren Buffett keeps an especially large cash holding so that he can “be greedy while others are fearful”. The other half of that equation is having the discipline to stockpile cash in ebullient times, i.e., “fearful while others are greedy.”

This job is often called “liquidity”, but optionality is not identical to the traditional “liquidity” solution of maintaining a large percent of your portfolio in cash. Many sophisticated investors run a barbell strategy: lots of long-dated illiquid assets balanced by lots of cash. The cash gives them liquidity and thus the ability to withstand long periods of illiquidity in the other half of their portfolio, which enables them to capture excess returns associated with time arbitrage. Another method of providing optionality is to have a highly reliable line of credit from a very low-risk source of credit, secured by assets that are not vulnerable to market dislocation. Gary Zimmerman observes that some of his hedge fund manager clients maintain zero cash. They tell him that if they ever need cash, they just borrow against their stocks. This is a rational way to keep optionality, without the opportunity cost of leaving money in cash. But such a strategy isn’t immune to the risk inherent in highly volatile markets, and thus may not provide the full cushion that liquid cash can provide (e.g., the 2008 Global Financial Crisis).

MaxMyInterest helps people manage their liquidity efficiently by automatically allocating and managing cash across multiple banks to earn the highest possible interest rates, even as rates change while keeping this cash fully FDIC-insured. This enables investors to maximize the return on the portion of their assets that they choose to hold in cash, without sacrificing safety or liquidity.

Compliance with the law. Firms like Behavox, AQMetrics, and ComplySci bring technology to the extremely complex process of complying with relevant regulations in all the domiciles in which an investment manager may operate. These technologies can also allow regulatory arbitrage, e.g., allowing investors to conduct activities in one geography which might be illegal in another geography.

Compliance with religion. Religious institutions, religiously observant individuals, and some family offices look for investments that are compliant with their religious views. Assets managed under Islamic principles have grown from $0.7b in 2007 to an estimated $3.0b in 2020, according to IJIMS.

For example, consider Omar Bassal, head of asset management for MASIC, a shariah-compliant family office based in Saudi Arabia. He structures investments in public equity, private equity, and real estate to comply with Islamic restrictions regarding business activities and interest, among other things. Omar sees “a shortage of investment funds that are specifically designed for investors that want to invest in a way that is consistent with Sharia laws.” Shariah-compliant funds are prohibited from investing in companies that derive income from the sales of alcohol, pork products, pornography, gambling, military equipment, or weapons. Additionally, Shariah-compliant funds cannot employ conventional leverage or sell shares short. Instead of investing in bonds, notes, T-bills, and other conventional fixed income products, Shariah-compliant investors favor trade finance funds, leasing funds, and “Sukuks” (income-generating asset-backed pools) which provide a substitute for the portion of investors’ portfolios that carries less risk than equity markets and provides yield.

Transfer wealth to heirs. It’s relatively simple to address the tax and legal considerations associated with moving assets to your children. It’s far harder to prepare children and sometimes newly-added family members (in-laws) for the challenges of “affluenza”. Early career coaching firms help the next generation get or stay professionally on track, e.g., Early Stage Careers, Evisors, Graduway, or TheMuse.

II. Functional Jobs to be Done

Easy and convenient user interface. Consumers are accustomed to mobile-native, intuitive interfaces when they shop onlineor use social media. Investment management firms need to offer a similar-quality user interface. One of the secrets of Robinhood’s explosive growth is its intuitive, game-like user interface. Almost every other trading platform requires more industry knowledge and has a longer learning curve to execute trades, especially complex trades. The convenience imperative is driving firms to offer automated customization, mobile-native system access, and integrated account access to as many client financial records as possible.

Customer service. If customers cannot accomplish their goal via the convenient user interface, they expect great customer service to address their issue. Investors look for investment managers who can make sense of the cacophony of information. Further, they need highly customized and often personalized help.

In the institutional space, Bridgewater has a “bend-over-backward-for-clients” internal culture. Bridgewater offers both large, highly skilled client service teams and a proprietary analytics team. The client service teams are staffed with professionals capable of being portfolio managers in their own right, while the analytics research is provided to clients at no extra charge. In the retail space, in addition to expertise, investors value empathy in their financial advisors: “An empathetic financial advisor is one who truly listens to clients, ensuring they feel understood and who demonstrate that they care.” Joseph Reilly Jr., a family office consultant in Greenwich, Connecticut, says that advising people about money is being “part financial expert, part shrink, and part friend and confidant.”

Access to inaccessible networks, e.g., celebrities or prominent investors. Some investors buy Berkshire Hathaway stock just to get an invitation to their annual meeting. Some VCs choose to invest in a company in part to build a stronger relationship with existing prominent investors. Companies that have raised money from celebrities sometimes attract investors eager to put money in just to have a shot at rubbing shoulders with the glitterati.

International venture capital firm HOF Capital is backed by over 70 families and institutions based across 21 countries, which own over 445 enterprises and brands and manage over $350b collectively. One of the reasons both limited partners and companies work with HOF is to get access to that powerful network.

One of the reasons why so many people are excited about investing in NFTs and DAOs is that these crypto-native investment opportunities come with built-in community, typically on Discord. Much of the Web3 community uses Twitter as the backbone of discussion about investments.

One of the unusual assets that Versatile VC has built is an invitation-only, free community for founders in transition, “Founders’ Next Move“. Membership is open to anyone who founded/cofounded a company which achieved at least initial traction. Versatile VC offers resources to help founders considering launching a new company; angel investing; getting a job; consulting; joining boards; or just getting a job. The firm’s view is that founders are a unique segment in the labor market, with unique needs, and it will create value by convening and backing some of those founders.

Education. A key aspect of your institutional competitive advantage is your internal knowledge stack. However, there is no ongoing education requirement for many professional investors. Most high net worth private investors have little to no formal education in contemporary investing, Joseph Reilly observes. The under-resourced and often relatively less-compensated institutional investor, the family office, and the smaller retail investor all find it difficult to keep current with market trends. They may have little understanding of the arms race around esoteric asset packaging rampant on Wall Street, or how high-frequency trading actually affects the market. It falls to money managers to educate investors on how new strategies work, although potential conflicts of interest abound.

Northern Trust’s private wealth practice has built an analytical platform that educates high net worth individuals about designing customizable portfolios specific to their unique circumstances. Brett Collins, formerly Chief Operating Officer – Investment Solutions Group, State Street Global Advisors, observed, “Traditional asset managers have also piled in, creating investment solutions groups that provide asset allocation advice and client-directed research to investors, with the hope of monetizing the effort though management fees on new outcome-oriented investment mandates.”

Some venture capitalists will acknowledge that they will invest in a space primarily for education, without having a clear vision of how the company’s vision will play out. The fastest-growing sector in investment research for the last two decades are expert networks, e.g., GLG or disruptor Xperiti. These networks displace what some managers historically considered their investment edge – a proprietary group of expert relationships built up over years in the business. The expert networks offer direct access to experts on any possible category for on-the-fly education. One hedge fund manager told us, “In the first few years of my career, I worked at Cisco and built a great network in the networking space. Then I went to business school and got a job in a hedge fund. And I realized I wasted the first few years because I could have just paid an expert network to give me that network.”

Self-discipline. Just as with losing weight, there is no shortcut to success in investing. Money Holders need to start by putting money aside, which requires discipline. There are business models that encourage such discipline, including certain retirement pools, e.g., 401Ks, which charge penalties for early withdrawal. This has two benefits: it allows the Money Manager responsible for the 401Ks to make long-term investments, and it also increases the likelihood that the retail investor will have more money for retirement. Many advisors automatically withdraw each month an investment allowance from their customers’ bank account.

Numerous companies have started to help people with their 401Ks. FeeX helps people reduce the fees involved with 401Ks. ForUsAll provides 401Ks for small businesses. Captain401 offers the “easiest and most affordable 401K retirement plan”. Guideline is an automatically managed 401K plan.

A Money Holder with a high level of sophistication and self-control will manage its own budget competently. But sadly, many Money Holders who are not institutions have weak self-control and low sophistication. The investment managers have visibility into their assets and so can provide a valuable service to them. For example, Digit helps retail users save more money, track their spending, pay off credit card debts, and minimize fees such as overdrafts. Acorns rounds up your purchases to make saving money as painless as possible.

Particularly creative is StickK, which enables you to sign a “Commitment Contract”, e.g., “save $25,000 for my honeymoon.” This is a binding agreement you sign between “present you” and “future you.” StickK helps users define their goal, acknowledge what it’ll take to accomplish it, and get it done. Stickk helps you achieve that goal through a combination of accountability and the risk that you’ll lose the money you may put up as a stake. You can select a person or organization that you elect to receive your stake money if you are unable to keep your commitment. This could be a charity you like, a charity you despise (e.g., the KKK), or a friend or foe.

III. Emotional Jobs to Be Done

Jobs at the emotional level create a deep connection with investors and lead to enduring relationships and improved economics through lower churn for managers and allocators alike. We have found that clients may not clearly express or even openly admit that they value “emotional jobs” at the same level as technical or functional jobs. That said, Trillium Jeong observed, “One can argue that all the technical and functional due diligence performed is to answer ’can I trust you with my money?’… and ‘trust’ is an emotion.” The money managers that perform these jobs well – jobs that may be more “social” or “experiential” – will consistently attract more assets.

Peace of mind. “No one ever got fired for investing in Goldman Sachs.” This fact is why large institutional investors invest in beautiful offices, highly visible philanthropy, and tailored suits (or in the social distancing era, beautiful Zoom rooms). There is less career risk investing in the same funds their peers select; career risk is one of the biggest enemies of alpha.

This goal typically directly contradicts the goal of generating alpha. Sanjay Gupta, an experienced institutional LP, said, “Smaller, hungrier emerging managers tend to outperform larger, more established groups. In addition, the alignment of interest is usually stronger with emerging managers. Their ability to create personal net worth is more tied to their alpha than it is to their management fees. A portfolio comprised solely of established, more languid managers will inevitably see decay in alpha every subsequent fund generation.”

One of the historic objections to venture capital is its long time to liquidity; LPs like the peace of mind of seeing capital some back periodically. A number of “Flexible VCs” have emerged, e.g., Versatile VC, which invest using a hybrid structure with the liquidity of mezzanine debt, but the flexibility and lack of covenants of venture capital.

In India, gold is an extremely popular savings vehicle: it has aesthetic use, doesn’t require reliance on government or financial institutions, is portable, and discreet. Rupeek is an Indian technology startup that believes that it can add 2% to the Indian domestic GDP growth rate by helping Indians borrow against the approximately 25,000 tons of gold (approximately $1 trillion worth) they are collectively holding.

Social validation. “I want to know that other smart people are investing alongside me.” One of the great ironies of investment management is you get the best returns by being contrarian, but most investors value the comfort of knowing that other investors think about a situation similar to the way they do. Social media exacerbates this pressure. Good and bad trading ideas can ricochet around social media.

An easy way to achieve this is to invest in a syndicate (if you’re an institutional investor) or through an angel investor group (if you’re an individual). Harvard Business School Alumni Angels of Greater New York, the largest angel group on the East Coast, effectively functions as a synthetic VC fund. In any given pitch night, one member will be a lawyer, another a private equity investor, another an operating executive. They each bring synergistic insights to a given company.

As an investment manager, figuring out ways to highlight your clients’ co-investors will help give them comfort in your product. An excellent example is Theranos, a fraud that raised a total of $1.4B in funding over 10 rounds. Despite this, they had very few traditional VC investors. It appears that many of these investors were investing based on who else was investing, but did not conduct underlying due diligence. They were “tourist VCs,” not people familiar with evaluating risky technology companies.

Exclusivity. Certain goods are inherently exclusive: a given piece of art or real estate is not normally interchangeable with any other piece of art or real estate. To help improve access to this asset class, MasterWorks is building a community for retail investors in blue-chip art, e.g., masterpieces by artists like Warhol and Monet.

Certain investors prefer to allocate in “selective” hedge funds, as opposed to boring mutual funds, precisely because hedge funds are not broadly marketed to the hoi polloi. Similarly, in the past few years, actors and professional athletes (neither historically groups known for investing acumen) have been piling into seed-stage technology investing because access to these companies is seen as exclusive.

Control. “Limited” partners are called that for a reason; they have minimal power over what a general partner chooses to invest in. One of the major reasons why more investors are choosing to go direct is they are excited about having perfect control over where their money goes, and significant influence over what the companies in which they invest do. Over the past decade, family offices have increased their direct investments nearly 4x (to $100bn+), and 50% of family offices plan to increase or maintain direct private equity (and venture) activity in coming years, according to UBS with data supported by Pitchbook. Mike Ryan, CEO, Bulletpoint Network, argues that this is mostly driven by the desire to increase control over the timing, purpose, and destination of family office’s capital allocations, although the desire to reduce fees is part of the story too. One way for asset holders to maintain control is through Separately Managed Accounts, where the investment funds remain in full control of the asset owner, and the financial advisor invests the assets for the asset owner according to a predetermined investment strategy.

Excitement. Some investors put money into art, wine, jewelry, antiques, stamps, or even a sports team, more as a passion investment than as a financial investment. Other investors put money into equity crowdfunding sites (e.g., Republic) and product crowdfunding sites (e.g., Indiegogo) in part because of the excitement and ego gratification of investing in a small, unknown, exciting startup company. The same is true for individual angel investments made by businesspeople who enjoy the continued engagement and the energy of small startups. The hope of a financial payout is not the only motivator for these angels who also invest their personal time and experience. One such angel shared that he invests in all the startups his buddies put money into because he does not want to be the only one left out at the local bar, toasting to the one startup with a 20X return.

Millennials and Generation Z expect more than just convenience from their online investment platform. They also are looking for entertainment and engagement. A few companies have emerged which use the excitement of gambling as a motivator to persuade users to save and invest. Long Game, PoolTogether.com, PrizePool, and Yotta Savings are “auction-based savings” companies that offer clients the chance to win lottery prizes by saving money on their platforms. This is a proven model in Brazil and certain other countries, which only recently has become legal in the US.

Continue reading…

This is part of a series on disruption of investment management that I co-wrote with Katina Stefanova, CIO and CEO of Marto Capital, a multi-strategy asset manager, which creates customizable investment solutions for institutional clients. We based this on interviews with over 50 family offices, sovereign wealth funds, endowments, pensions, and other institutional investors.

We wrote the first version of this research with Brent Beardsley, formerly a Partner with Boston Consulting Group.

Contributors

This study would not have been possible without the collaboration and support of Brent Beardsley and the Boston Consulting Group. We also want to thank the research, technology, and editorial team who supported us during this study: Greg Durst, Jen McPhillips, Jenny Wong, Charles McLaughlin, Michael Rose, and James Ebert, plus more recently Ariel Cohen, Caleb Nuttle, Spencer Haik, and Cormac Ryan of Bullet Point Network, where David Teten is an Advisor.

Disclaimers and Disclosures

David Teten is an investor in numerous investment tech companies, including Addepar, Asaak, Clarity (sold to Goldman Sachs), Drop Technologies (Cardify), Earnest Research, Indiegogo , Republic , Stratifi, Wonder, and Xperiti. Katina Stefanova is an investor in AcordIQ and Long Game and is a former Bridgewater Senior Executive.

We cross-posted this at Techcrunch.

What Are the “Jobs To Be Done” of an Investment Manager?

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