Investment Firm success depends vitally on talented investment managers delivering strong and consistent investment results.
Good investment results are the observed returns, but also delivered over the right timeframe inside the defined risk profile. Both risk and return are important.
Investment results are more impressive when they are delivered consistently over time. In other words, as the investment track record builds.
Investment track record is at the heart of the investment firm’s brand attractiveness. As track record extends and improves, the investment firm’s brand image and reputation strengthen too.
In turn the Assets Under Management (AUM) increase strongly too because:
- AUM mandates are retained.
- The investment return increases AUM; and
- New mandates are attracted.
Bigger AUM increases revenue strongly due to higher flat and success fees.
Lack of track record is a strong barrier to entry. New players often rely on “Star” talent from established Investment names to be credible.
The main cost of the investment firm is talent, which can be very big. The compensation model can deliver high pay on success, with a major part of that based on variable pay linked strongly to delivered observable success.
However, the marginal cost of extra AUM is low compared to the extra revenue. That profile drives profitability up strongly. In short, the business model has high operational leverage.
Spending compensation on the right talent in the right way is central to investment firm success.
Small wonder then that investment firms take such care with their extensive, complicated, and expensive compensation programmes. Retaining and attracting top talent is the keystone to the investment firm virtuous circle.
Talent delivers the investment track record. Track record drives AUM growth, which in turn drives revenue, and profit growth. It is those profits that fund high bonus delivery, which retains and attract top quality talent. Which delivers ongoing investment track record, and so on round and round.