One of the rewarding aspects of working in a small, yet growing industry is that I’ve had the chance to talk with a lot of people. Some were institutional investor clients and prospects, but many are either fellow professionals whose work I have long admired, or people who are interested in opening their own business and joining the third party marketing industry. During my 25-year career, I’ve always found that talking about my own 3PM business with others, by carefully listening to them, forced me to think more deeply and critically about my company, Arrow Partners, as well as the industry in general.
Like any smart, conscientious business owner, I’m always trying to figure out where we’re going. In doing so, I’ve always found it helpful to review where we’ve been. What steps have we taken to move our business forward and what have we done that has held us back? Arrow Partners has been a successful enterprise because, by and large, we have stuck to what we know – the institutional marketplace. During the past 15 years, we have been confident enough in our instincts to experiment when it made sense to do so, humble enough to admit our mistakes and cut our losses when necessary, and determined not to outsmart ourselves by ignoring the obvious. We will continue to gather insight and wisdom to afford us the vision to see and plan for what will be necessary for our 3PM firm to survive and thrive in the future:
A focused and concentrated effort
Similar to investment managers, tomorrow’s 3PM firms must be able to differentiate or position themselves from others in the industry. Successful firms should always articulate their competitive advantage and be able to say, “We are the premier 3PM firm that specializes in _______….” In other words, identify and describe what makes you different.
The least successful firms tend to aspire towards “jack-of-all-trades” status, casting their net far and wide in search of any new business they can land. All too often, such firms will end up representing more managers than their infrastructure can support and cover geographic territories and market segments with which they are unfamiliar. Such firms will almost always eventually disappoint their clients, go out of business and leave a stain on the 3PM industry.
Learn from Mistakes
Repeating mistakes is a sure-fire way to destroy a 3PM firm’s credibility and doom its future as a going concern. While it is true that failed or unfulfilled relationships happen, analyzing the reasons for a failure is an important key to avoiding similar situations in the future.
Analyze, identify, and establish guidelines and procedures to avoid repeating mistakes in the future. Write them down, make them firm policy, review them regularly and make this task a routine and top priority.
Learning to say "No"
Most of Arrow Partners’ early problems stemmed from the inability to say “no” to an existing or potential client.
Before a firm becomes established in the industry, the insecurities of a new business owner often tempt them into trying to please everyone, even if the request clearly falls outside of a firm’s areas of core competence.
In addition, accepting any assignment, and consequently falling into the trap of working with anyone willing to hire you is a siren’s song to be avoided at all costs. Rest assured, very often you will discover that the sooner you learn to say “no,” the quicker your business will thrive.
Strive to Improve
There are two ways business owners confront success: complacency and urgency. After many years in business, I’ve seen many successful 3PM firms lose their sense of urgency from when they first entered the industry. Their approach and pitch remains frozen in time, their Website and marketing materials never change; what they provide for clients becomes a cookie-cutter approach or style, one most often indistinguishable from one client to the next.
To remain a relevant, value-added service to your clients, 3PM firms have to constantly challenge themselves to become more efficient, do more with less, embrace outsourcing of non-core functions, learn about social media and new technologies, revisit every aspect of their business on a regular basis, and periodically establish deadlines and accountability for such reviews.
In addition, this also means the firm should analyze and leverage its core competencies. Make industry contacts in new distribution channels and diversify geographic territory coverage in order to better serve existing clients and offer greater opportunities for future ones.
Taking such actions surely will help ensure that a 3PM firm will continue to deliver a complete range of marketing support and materials that will attract high quality manager-clients.
Establish a united front
The client-3PM relationship is based entirely on trust. The 3PM firm must impress upon the client the importance of openness and honesty between parties. Everyone must be enthusiastic and confident in the conception and execution of the total marketing and sales effort which the 3PM firm oversees. A divided effort, or one in which the manager client’s commitment is tepid, is usually the fast track to failure.
One of most important components of any successful relationship is in place when the 3PM firm assumes complete responsibility for the full range of marketing materials and documents. This includes active participation to design and create presentation materials, populate databases, complete RFPs, and write Web content.
While the 3PM firm must be responsible for the marketing and sales effort, the client must always be an active partner and contributor to the effort as well. In most cases, the 3PM is considerably more skilled than the portfolio manager in the nuances of how to be successful in the marketplace.
Our business is not just about how to pick up the phone, send an email or arrange meetings. It is also about positioning and differentiation. So be sure the client understands this fact; that the relationship depends upon how you will allocate your firm’s resources to their best use. In other words, money managers focus on what they do best (manage assets) and ask the 3PM to do what they do best (gather those assets).
Measure everything worth measuring
Investment managers constantly measure and are being measured. Comparisons to benchmarks, indices, and peer groups are commonplace, available in real time, and appear everywhere. In addition, detailed holdings-based attribution analysis provides investors, consultants and clients with the means to analyze every component of the investment decision process.
Today’s 3PM firms need to create an infrastructure to generate detailed quantitative reports which measure and evaluate the 3PM’s marketing efforts. In addition to the obvious metric of assets gathered and number meetings held, 3PMs should track: site visits to manager’s office, conference calls, days away from office per month, number of second (or third) meetings with a prospect or client.
When a 3PM firm experiments with new procedures or materials, having these metrics to measure changes in performance are vital. To be a success, none of us can just go by gut feelings.
Regulatory adherence
The 3PM industry has come under increased scrutiny in recent years with respect to conflicts of interest, lack of disclosure, and limited transparency. While the scrutiny helps to weed out the unethical and immoral players in the industry, the behavior that drew the unwelcome spotlight in the first place is completely unacceptable.
We are a small, burgeoning industry that still lacks the heft and resources to aggressively combat such negative perceptions. As a result, regulators, the media, and even many investment managers are all too often now skeptical towards 3PM firms, an attitude which has tarnished our industry on many levels.
As a consequence, every firm must develop appropriate “culture of compliance” principles, and commit to staying up-to-date on the ever-changing regulatory landscape.
Communicate effectively with managers
Communication is among the most important components of the 3PM-client relationship. Without it, the firm’s efforts are almost always certain to fail. As 3PMs, we must be honest, clear, and open- minded. Remember that you and your client are on the same team. Because no one likes unexpected surprises, especially negative ones, you must be up-front and timely with any bad news or nascent problems.
One of the best investments Arrow Partners recently made was to purchase a webcam, and then download Skype, the free internet conferencing software. This now allows us to look our manager clients in the eye when delivering news, good, bad, or indifferent. And without even the need to leave our offices.
At the end of the day, all 3PM firms, old and new alike, must build their business one great client at a time - there aren’t any shortcuts. But by working smarter, communicating with each other, and going about our business with the highest ethical standards, each of us will do our part to ensure the 3PM industry has a bright and prosperous future.