Speaking at the 16th Annual Wraps, Platforms & Masterfunds Conference in the Hunter Valley on Friday, Tria Investment Partners partner Oliver Hesketh cast doubt on the notion that size inevitably leads to economies of scale.
Mr Hesketh examined the relationship between size and economies of scale in the asset management, superannuation, platforms and financial advice sectors.
Globally listed asset management firms are the least likely organisations to benefit from growing in size, he said.
“When we look at cost to income ratios, we would expect the little guys to have high cost-to-income ratios and the really big guys to have low cost-to-income ratios,” Mr Hesketh said.
However, the data does not bear out that hypothesis, he said.
“There is very little relationship between size and the benefits of scale in asset management,” Mr Hesketh said.
The reasons are twofold: first, asset managers tend to spend enormous amounts on marketing and distribution; and second, capacity constraints mean new investment staff have to be hired as FUM increases, he said.
Financial advice is another sector that struggles to ‘scale’ well, Mr Hesketh said – borne out by the fact that institutional advisers do not have more funds under advice than non-aligned planners.
“Every time a new customer comes in, 10 man hours have to be spent putting together a statement of advice,” Mr Hesketh said.
But scale is coming to financial advice in the form of emerging technology and robo-advice, he continued. When it comes to superannuation, scale benefits certainly exist, which is evident from the continuing cannibalisation of smaller super funds.
Economies of scale are also available in some sectors of the platform market.
“There are a few instances of scale not delivering what we thought it might,” Mr Hesketh said. “Being big doesn’t mean you scale, or that you can extract economies of scale from your business.
“And there’s no use being big if you don’t have scale. Why be big and unwieldy and complex and not have scale? You could be small and nimble and not have scale.
“But being big can be important,” he added. “Scale is a potential source of competitive advantage – but it’s not the only one.”
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