Does asset management have a reputation issue?

David Masters, Director, Lansons Team Farner, explores what’s next for reputation in asset management following recent scandals in the industry.

Given that there has probably never been a harder time to be a fundamental active fund manager, crises excepted, then the answer to the question “does asset management have a reputation problem” is most likely a simple “yes!”.

Such glibness rather belies the complexity of the issue, however. Moreover, it leaves the key question unanswered – if asset management has a reputation problem, how does it solve it?

Typically, the solutions to asset management’s reputational woes are defined as needing to improve transparency, implementing better fee structures, and having stronger governance.

Whilst I disagree with none of those, the reality is much harder to navigate. None of the above are going to make anyone care more about asset management. They will not make asset management seem more relevant. They might have some reputationally beneficial effects over time, but they are not going to revolutionise perceptions of the sector. For that to happen, much more is going to need to change.

Nor is the reputational challenge felt evenly across the sector. Global firms like BlackRock and Vanguard, who manage north of $20 trillion combined, do not appear to be suffering from any substantial reputational negativity, at least as measured by fund flows.

One challenge for the asset management industry is that it is highly fragmented. It operates at global, regional and national levels, with differing regulatory hurdles across all of these. It functions across passive, systematic active and fundamental active investment approaches (and a lot in between). It serves a multitude of different audiences, typically described as institutional, wholesale and retail. It invests in many different asset classes across public and private markets (and wherever crypto fits).

Therefore, trying to effectively gauge perceptions, both of the general public and professional investing audiences, is unlikely to be a precise science, but the consensus is not good. Furthermore, the sector has struggled to overcome various crises – from the Woodford scandal, through to liquidity mismatching on property funds and greenwashing concerns, all of which have weighed on the public conscience.

The sector itself is going through something of a crunch. In 2024, PWC predicted that over the next five years around one in six asset management brands would disappear and I have not yet found anyone who thinks that is an overestimate. The rate of consolidation is increasing and is becoming more pronounced in Europe as recent deals between Axa IM and BNP Paribas and Natixis’ owner BCPE and Generali demonstrate.

The challenge for the industry is that 16% of brands can disappear in a five-year period and few people outside of the industry will notice. Fewer will care. Asset management brands do not engage their audiences in the way that consumer brands do. For most of the public, asset management is just part of a broad financial services blob. To improve their reputations, asset managers to build better brands. They need to make a better connection with their audiences, ideally on an emotional level rather than a purely transactional one.

To improve brand, we need to consider the purpose of asset managers. What are they for? They function on several levels – commercial (e.g., to make money for their shareholders), economic (e.g., capital allocation through the economy, employment of the labour force, etc.), and societal (e.g., to help investors meet their long-term financial needs).

Given that the second of these (economic) is as much a how as a why, we can overlook this one for a moment. Therefore, we can say that asset managers exist to make money for shareholders by helping end investors meet their financial goals. This brings us back to the point about transparency, fees and governance. Up until relatively recently, investment performance was the primary driver of asset management, particularly in the days of star fund managers.

With the rise in passive investing, absolute returns are no longer such an important component of how investors perceive fund firms, and star managers no longer light up the firmament. The emphasis is much more on relative returns and predictability, something that unconstrained stock pickers naturally find harder to convince investors about. The rise of systematic active ETFs in the US, and slowly in Europe, reflects the fact that many investors still want or need to outperform the market, but they now seek lower and better aligned fees, alongside much greater transparency.

The concept of governance is also important. As the co-host of a podcast on regulatory misconduct and reputation across the sector, it does seem to me that the asset management sector has much work to do on this front. Its easy to point to the big high-profile scandals – Woodford, Odey, greenwashing, and so forth, but these are just the visible tip of the iceberg.

Whilst it’s easy to blame a heavy-handed regulator, and one that is far from perfect itself, asset managers have made life hard for themselves. Groupthink has too often prevailed, and the industry has simply been too slow to react to societal and technological change. Recent FCA initiatives, such as Assessment of Value and Consumer Duty, are slowly influencing the behaviour of fund companies in a more positive way, but more needs to be done. Diversity at fund firms needs to improve so that the sector better reflects and better understands its customers.

Encouragingly, the consolidation of firms and concentration of flows that beset the sector may end up being key to its salvation. As the number of asset management brands slowly diminishes, so the importance of brand increases – meaning that firms will need to invest more in building brands and engaging more effectively with their key audiences.

As product proliferation reduces, more funds should operate at levels where economies of scale can be better achieved and fees can better align to the investor, without sending the shareholders of fund firms scurrying for the hills.

But this will require intent, and a willingness to acknowledge the failings of the past so that everyone can move on, and reputations can be slowly rebuilt.

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David Masters is the co-host of asset management podcast ‘(mis)Conduct, Money & Reputation’, a series discussing the intersection of regulation and reputation. Season two is now out, starting with episode one, ‘Odey, Woodford & the FCA’, unpacking the scandals surrounding Crispin Odey and Neil Woodford, analysing how they have not only tarnished their personal reputations but also sparked fundamental questions about trust in the system. Listen here.