Jobs to be Done of an Investment Manager

Disruption in Investment Management

Clayton Christensen, a late professor from Harvard Business School, observed that disruptive forces often originate in the lower tiers of a market before progressively appealing to higher-end customers. A similar pattern is currently unfolding within the investment management sector.

The industry is exhibiting classic signs of impending disruption – notably, dissatisfied clients alongside highly profitable established firms.

Applying the Disruptive Innovation Framework

To anticipate the next generation of disruptors, we are employing professor Christensen’s established Disruptive Innovation framework. This approach emphasizes analyzing a company based on the “jobs to be done” for its clientele.

A common misconception among money managers is that their primary function is alpha generation. However, this is inaccurate.

Amanda Tepper, CEO of Chestnut Advisory Group, asserts that investment performance, in isolation, isn't the primary driver of asset allocation decisions.

The Jobs to be Done by an Investment Manager

Below is a summary of the various “jobs to be done” by an investment manager, categorized by technical, functional, and emotional benefits.

Consider Vanguard Group as an example. They provide not only the technical and functional advantages of low-cost investing but also cultivate the emotional benefit of trust.

This trust stems from their demonstrated commitment to prioritizing client interests over maximizing profits.

Here's a breakdown of these benefits:

• Technical Benefits: These relate to the core capabilities of the investment process.
• Functional Benefits: These concern the practical aspects of how the service is delivered.
• Emotional Benefits: These address the feelings and perceptions clients have about the investment manager.

Understanding these distinct layers of value is crucial for identifying and evaluating potential disruptors in the investment management landscape.

A Categorization of Investment Manager Responsibilities

Technical Aspects: Core Functions of the Investment Offering

• Investment approaches: Achieving returns exceeding market benchmarks (alpha generation); safeguarding capital and limiting losses; aligning investments with financial commitments; reducing costs, including taxes; focusing on specific industry segments; fulfilling ethical, political, or societal objectives; and mitigating extreme, low-probability risks.
• Investment implementation: Identifying potential investment opportunities; conducting thorough research and due diligence; making informed investment choices; overseeing portfolio management; and strategically exiting positions.
• Investment oversight: Handling administrative tasks; creating future opportunities; ensuring adherence to legal and regulatory requirements; and facilitating wealth transfer to beneficiaries.

Functional Benefits: Client-Facing Services and Support

• A streamlined and user-friendly platform; dedicated customer support; access to valuable professional networks; educational resources; and tools to promote consistent investment behavior.

Emotional Value: The Client's Subjective Experience

• Providing reassurance and security; fostering a sense of belonging and prestige; offering a feeling of empowerment and control; and generating enthusiasm and anticipation.

Essential Technical Competencies for Money Managers

To remain competitive, a money manager is required to demonstrate proficiency in a range of technical skills. Achieving a satisfactory standard across these areas is fundamental to even participating in the investment landscape. The following outlines the primary technical responsibilities, presented in approximate order of significance.

Categorizing Technical Responsibilities

These competencies are divided into three key areas: (a) formulating investment strategy; (b) implementing investment decisions; and (c) managing the administrative aspects of investments.

Investment Strategy Development

Developing a robust investment strategy is paramount. This involves a deep understanding of market dynamics and economic principles.

Successful strategy formulation requires rigorous analysis and the ability to anticipate future trends. It’s the cornerstone of effective money management.

Executing Investment Decisions

Once a strategy is defined, the next step is to execute investments effectively. This demands precision and a thorough grasp of trading mechanics.

Efficient execution minimizes costs and maximizes returns. It’s a critical component of translating strategy into tangible results.

Administering Investments

The final area encompasses the administration of investments. This includes record-keeping, reporting, and ensuring regulatory compliance.

While often less glamorous, proper administration is essential for maintaining investor trust and avoiding legal issues. It forms the operational backbone of the entire process.

Maintaining accurate records and fulfilling reporting obligations are non-negotiable aspects of responsible money management.

Investment Strategy

Generating Alpha

Certain investors prioritize maximizing returns, demonstrating a greater tolerance for market fluctuations. These individuals are often willing to accept increased volatility in pursuit of higher gains.

Investors focused on superior returns may consider allocating capital to emerging asset classes, which have historically yielded substantial profits for early adopters. Examples include art, carbon credits, collectibles, cryptocurrencies, frequent flyer miles, internet domain names, individual lifetime income, litigation finance, mineral rights, patents, SaaS company recurring revenue, non-fungible tokens (NFTs), social media accounts, Amazon FBA third-party seller businesses, and other virtual currencies like video game assets.

Typically, these asset classes are characterized by limited liquidity, a lack of robust legal safeguards, questionable credibility with established investors, and the absence of standardized indices. They also carry exceptionally high risk. However, as these markets mature, they progressively develop the infrastructure common to more established asset classes.

Angel investing represents another high-return opportunity, exhibiting median returns of 18% to 54% across twelve academic studies. Nevertheless, angel investing involves a lengthy investment horizon, significant dispersion of outcomes, substantial time commitment, and limited transparency.

Avoiding Significant Losses

The aversion to financial loss is often stronger than the desire for profit. Specialists in structured products, such as Axio Financial, directly address this concern. Halo functions as a two-sided marketplace, connecting investors with structured products offered by prominent global financial institutions, thereby simplifying access to these instruments.

Aligning Investments with Financial Commitments

Pension funds exemplify investors who prioritize fulfilling financial obligations over maximizing returns. Even family offices, without formal pension commitments, must strategically plan for future cash flows from illiquid investments.

Inflation represents a universal financial liability. Inflation-linked bonds offer a solution, alongside traditional hedges like real estate and commodities. In nations historically experiencing high inflation, such as China and India, investors frequently allocate a considerable portion of their wealth to gold.

On an individual level, a primary concern is maintaining one’s lifestyle – covering expenses like mortgages and food. Individuals seek sufficient liquid assets to cover several months, or ideally years, of living expenses, even in the event of investment downturns.

High-net-worth households typically hold 25.2% of their assets in cash, often outside their primary investment portfolio. While potentially reducing overall returns, this liquidity can provide psychological resilience during market volatility, preventing panic selling.

Minimizing Investment Costs

Vanguard serves as a benchmark for low-cost investment management, due to its focus on index funds requiring minimal research and its unique ownership structure – being owned by its own funds. While hedge and private equity funds disclose management and performance fees, other expenses like legal, compliance, entertainment, custody, and middle-office costs, can add up to 100 basis points, often with limited transparency.

Platforms like Addepar, Novus, and Vitrio consolidate and reveal these embedded costs within a holistic portfolio governance framework. Novarca assists institutional asset owners in identifying and reducing unnecessary expenses to improve returns.

Reducing Tax Liabilities

Unmanaged taxes and transaction costs can significantly erode investment returns. Robo-advisors offer automated tax-loss harvesting to minimize tax burdens. Donor-advised funds, popularized by companies like Daffy, enable investors to support charitable causes while benefiting from tax advantages typically reserved for foundations and endowments.

Betterment addresses the challenge of balancing customer control with tax optimization. They visually demonstrate the tax implications of each trade, deterring users from realizing losses unnecessarily. Explicitly showing the immediate cash cost of a losing sale discourages impulsive tax-loss harvesting.

Early-stage venture capital represents a highly tax-advantaged asset class. While most U.S. assets face long-term capital gains taxes of 15%-20% plus a 3.8% Medicare tax, and potential Alternative Minimum Tax (AMT) implications, gains from Qualifying Small Business Stock (QSBS) are federally and in 45 states tax-free, excluding Medicare tax and AMT adjustments. Furthermore, losses are generally deductible.

Targeted Sector Exposure

Investors frequently seek exposure to specific sectors for strategic and risk mitigation purposes. This demand fuels the creation of specialized funds with narrowly defined investment mandates. Exposure to difficult-to-trade markets, such as frontier markets, is a common example. Republic facilitates access to late-stage private companies and funds that are typically inaccessible.

Several platforms are streamlining the process of connecting limited partners and general partners. These platforms, such as Allocate and iCapital Network, help investors identify specialty funds tailored to their specific needs. CEPRES, Palico, and Trusted Insight offer similar services for institutional investors.

Values-Based Investing & Legacy Planning

An increasing number of investors prioritize aligning their investments with their personal values – whether social, religious, or hobby-related. Millennials and women are more likely than previous generations, and men generally, to seek both financial returns and positive social impact.

Social impact, or “green,” bonds provide a mechanism for investing in companies committed to achieving defined social objectives. Ethic is a technology-driven asset manager specializing in sustainable investment portfolios.

Protecting Against Extreme Risks

A significant portion of investors aim to safeguard themselves against major economic disruptions. This may involve acquiring a secondary luxury residence in a stable country like Canada or New Zealand. Portable wealth, such as gold, jewelry, and diamonds, facilitates easy cross-border movement. Certain local businesses, like restaurants or farms, can generate income even during turbulent times.

Catastrophe insurance, like flood insurance, offers protection against specific, narrowly defined risks. However, in a severe tail risk scenario, traditional financial institutions may prove unreliable. Companies like Praedicat improve the underwriting and management of liability catastrophe risk, while PreData provides predictive analytics for geopolitical risk.

Executing Investment Strategies: A Technical Overview

Successful investing fundamentally relies on making informed and strategic investment choices. This process can be dissected into five distinct, yet interconnected, stages.

• Identifying potential investment opportunities.
• Conducting thorough research and due diligence.
• Formulating investment decisions, supported by financial modeling and sensitivity analysis.
• Actively managing the investment portfolio.
• Planning and executing an exit strategy.

Identifying Investment Opportunities

Many investors utilize platforms like ExplodingTopics to monitor social media trends and uncover emerging investment themes. Investors in public markets can leverage online communities such as SumZero, Seeking Alpha, and The Motley Fool to discover new ideas. For private mid-market sourcing, Axial and Intralinks Deal Nexus provide increased transparency.

Numerous data companies are striving to become the leading source of information for private company analysis, mirroring the capabilities of Bloomberg.

Research and Due Diligence Procedures

Investment teams traditionally compile research materials in various formats – notes, files, and CRM systems – and manage communication through extensive email exchanges. Wonder provides rapid, outsourced research support by accessing a network of over 6,000 analysts. ParagonIntel focuses on tracking the activities of key management teams within prominent companies, offering early insights into potential challenges, transitions, and pivotal moments.

Companies like Drop Technologies (Cardify) and Earnest Research utilize alternative data sources to track key performance indicators, assess position sizing, prioritize opportunities, and generate investment ideas. Toggle provides individual investors with access to quantitative, AI-driven tools previously exclusive to large institutional investors.

Formulating Investment Decisions

Investment decisions are commonly reached during investment committee meetings. After gathering relevant data, teams typically develop several financial models and prepare a memo outlining the investment narrative, potential opportunities, associated risks, and key considerations. This approach is most effective when research is robust, the team maintains discipline, and decision-makers possess strong judgment.

Bullet Point Network (BPN) offers a patented software platform and methodology designed to enhance research management and scenario modeling, ultimately leading to more informed investment decisions. BPN’s platform allows for the creation of up to 100 scenarios based on a company’s projected cash flows, assigning probabilities to key drivers based on investor insights.

Portfolio Management Strategies

Stratifi provides a cost-effective, user-friendly, and scalable SaaS platform for portfolio hedging. Accordion Partners’ Maestro platform is engineered to help private equity firms systematize and enhance their approach to accelerating value creation within portfolio companies.

Executing Exit Strategies

Several companies are focused on increasing transparency and reducing reliance on chance encounters within the M&A process, particularly for later-stage companies. These include Axial, BankerBay, Intralinks Deal Nexus, and Interexo. EquityZen, SharesPost, and ZenPrivEx offer specific solutions to facilitate the liquidation of positions held by employees and investors in late-stage companies.

Technical Tasks: Administrative Functions

Among the final categories of essential technical tasks are those related to administration.

Administration in Investment Management

Addepar was initially developed to fulfill a specific need, particularly for family offices dealing with diverse portfolios and inconsistent reporting standards. Similarly, Carta provides tools for companies and investors to effectively manage cap tables, valuations, investment details, and equity plans.

A growing number of investment firms are prioritizing increased transparency. ARK Invest, for example, offers Exchange Traded Funds (ETFs) with almost real-time visibility into their individual trading activities.

A significant challenge for institutional investors currently is the insufficient clarity and control over all fees levied by their managers. This lack of transparency presents opportunities for companies like Vitrio and Novus, which offer technology platforms designed to help institutional investors systematically monitor fund managers.

Developing Investment Flexibility

Historically, many successful investors have achieved substantial returns by capitalizing on market downturns. Gary Zimmerman, CEO of MaxMyInterest, points out that Warren Buffett deliberately maintains a substantial cash reserve to facilitate investment during periods of market fear.

While often referred to as “liquidity,” optionality differs from simply holding a large portion of a portfolio in cash. A common strategy among sophisticated investors is a barbell approach: a combination of long-term, illiquid assets alongside a significant cash position. This cash provides the necessary liquidity to navigate extended periods of illiquidity in the other assets, enabling the capture of returns from time arbitrage.

Another approach to building optionality involves securing a dependable line of credit from a secure lender, collateralized by assets resistant to market disruption. Zimmerman notes that some hedge fund clients maintain no cash holdings, preferring to borrow against their stock holdings when needed. This strategy allows for optionality without the opportunity cost of holding cash, but it is susceptible to risks in volatile markets and may not offer the same security as liquid cash reserves.

MaxMyInterest assists in efficient liquidity management by automatically distributing and managing cash across multiple banks to maximize interest rates, even with fluctuating rates, while ensuring full FDIC insurance. This allows investors to optimize returns on their cash holdings without compromising safety or accessibility.

Legal and Regulatory Compliance

Companies such as Behavox, AQMetrics, and ComplySci provide technological solutions for the intricate process of adhering to regulations across all jurisdictions where an investment manager operates. These technologies can also facilitate regulatory arbitrage, potentially allowing investors to engage in activities permissible in one location but prohibited in another.

Religious Compliance in Investing

Certain religious institutions, individuals adhering to religious principles, and some family offices seek investments aligned with their faith-based beliefs.

Wealth Transfer to Future Generations

Addressing the tax and legal aspects of transferring assets to children is relatively straightforward. However, preparing children, and potentially new family members, for the challenges associated with wealth – often termed “affluenza” – is considerably more complex. Firms specializing in early career guidance assist the next generation in achieving and maintaining professional success, including companies like Early Stage Careers, Evisors, Graduway, and TheMuse.

Core Functions for Investment Success

A user-friendly interface is paramount in today’s digital landscape.

Consumers have grown to expect seamless, intuitive experiences when interacting with online platforms and social media. Consequently, investment management companies must deliver interfaces of comparable quality. The rapid expansion experienced by Robinhood can be largely attributed to its engaging, game-like user interface design.

Responsive customer support is a critical component.

Should users encounter difficulties navigating the interface, they anticipate prompt and effective customer service to resolve their concerns. Joseph Reilly Jr., a consultant specializing in family offices located in Greenwich, Connecticut, emphasizes that financial advising necessitates being “a financial expert, a psychological counselor, and a trusted friend and advisor.”

Gaining access to exclusive networks can be a significant draw.

The desire to attend Berkshire Hathaway’s annual meeting motivates some investors to purchase stock in the company. Similarly, venture capital firms may choose to invest strategically to strengthen relationships with established, influential investors. Companies backed by celebrities often attract investors hoping for opportunities to network with high-profile individuals.

HOF Capital, an international venture capital firm, benefits from a network comprising over 70 families and institutions, collectively holding over 445 businesses and managing assets exceeding $350 billion. Both limited partners and companies collaborate with HOF Capital to leverage this extensive and influential network.

The burgeoning interest in NFTs and DAOs is partly fueled by the inherent community aspect of these crypto-based investments, typically fostered on platforms like Discord. Twitter frequently serves as the primary forum for discussion and analysis within the web3 investment community.

Investor education is often overlooked but vitally important.

Many professional investors are not subject to continuous education requirements, potentially leading to a lack of understanding regarding complex financial instruments and market dynamics. It is the responsibility of money managers to educate investors about new strategies, despite the potential for conflicts of interest.

Some venture capitalists openly admit to investing in specific areas primarily for learning purposes, even without a fully formed vision for the company’s success. The expert network industry, including firms like GLG and Xperiti, has experienced substantial growth in the past two decades. These networks are increasingly replacing the proprietary expert relationships that managers once considered a key competitive advantage, offering on-demand access to specialists across diverse fields.

Maintaining self-discipline is essential for long-term success.

Similar to achieving fitness goals, consistent effort is required for successful investing. Individuals must prioritize saving, which demands discipline. Certain financial models, such as 401(k) plans, incentivize this discipline by imposing penalties for early withdrawals.

A growing number of companies are dedicated to assisting individuals with their 401(k) management. FeeX focuses on reducing 401(k) fees. ForUsAll provides 401(k) solutions for small businesses. Captain401 promotes itself as offering “the easiest and most affordable 401(k) retirement plan.” Guideline provides an automatically managed 401(k) plan.

Digit assists retail investors in saving money, tracking expenses, managing credit card debt, and avoiding fees like overdraft charges. Acorns simplifies saving by rounding up purchases to the nearest dollar.

StickK offers a particularly innovative approach, allowing users to create a “commitment contract” – for example, “save $25,000 for my honeymoon.” This is a legally binding agreement between one’s current self and future self. StickK facilitates goal achievement through accountability mechanisms and the potential loss of funds pledged as a stake.

Emotional Drivers in Investment Decisions

Investment choices are frequently influenced by factors extending beyond purely rational financial analysis, with emotional considerations forging strong connections between investors and opportunities.

A Sense of Security

The perception of stability plays a significant role; the adage “one won’t be dismissed for investing with Goldman Sachs” highlights this. Institutional investors often gravitate towards well-established firms with prominent reputations, minimizing potential career repercussions – a substantial impediment to achieving superior returns.

This inclination towards safety can, however, be at odds with the pursuit of substantial gains. Experienced limited partner, Sanjay Gupta, has observed that smaller, more agile emerging managers frequently deliver higher performance than their larger, more established counterparts.

The extended timeframe required for liquidity in ventures like venture capital is often a concern, as investors generally prefer periodic returns of capital for enhanced peace of mind.

In India, gold serves as a favored savings medium due to its inherent value, independence from governmental or financial systems, portability, and privacy. Rupeek, an Indian startup, posits that unlocking the value of the nation’s approximately 25,000 tons of gold—valued at roughly $1 trillion—could contribute a 2% increase to India’s GDP.

The Need for Social Validation

Many investors seek reassurance by observing the participation of other respected individuals. While contrarian strategies often yield the greatest returns, a sense of comfort arises from knowing that others share a similar perspective on an investment.

This desire for validation is often satisfied through investment syndicates for institutions or angel investor groups for individuals.

The Appeal of Exclusivity

Certain assets, such as NFTs, artwork, and real estate, possess inherent exclusivity due to their unique nature. Masterworks is facilitating access to this asset class for retail investors by creating a community focused on blue-chip art from renowned artists like Warhol and Monet.

The limited accessibility of hedge funds, in contrast to broadly marketed mutual funds, is often seen as a positive attribute by certain investors, reinforcing their perception of exclusivity.

The Desire for Control

The designation of “limited” partners reflects their restricted influence over investment decisions made by general partners. A growing number of investors are opting for direct investments, driven by a desire for greater control over capital allocation and influence over portfolio companies.

Over the last ten years, family offices have increased their direct investments almost fourfold, exceeding $100 billion, with 50% planning to maintain or expand this activity. Mike Ryan, CEO of Bullet Point Network, attributes this trend primarily to the pursuit of control over timing, purpose, and destination of capital, alongside a desire to lower fees.

The Pursuit of Excitement

Some investments, like art, wine, or collectibles, are driven by passion rather than purely financial considerations. Others are drawn to equity crowdfunding or product crowdfunding, motivated by the thrill and prestige of supporting nascent, innovative companies.

Innovative companies like Long Game, PoolTogether.com, PrizePool, and Yotta Savings are leveraging the appeal of gamification to encourage saving and investment, offering lottery-style prizes for platform users. This model has proven successful in Brazil and is gaining legality in the U.S.

Important Disclosures:

David Teten holds investments in a variety of investment technology firms, including Addepar, Asaak, Clarity (acquired by Goldman Sachs), Drop Technologies (Cardify), Earnest Research, Indiegogo, Republic, Stratifi, Wonder, and Xperiti. He also serves as an Advisor to Bullet Point Network.

Katina Stefanova has investments in AcordIQ and Long Game and previously held a senior executive position at Bridgewater.

Acknowledgements:

The initial draft of this paper was co-authored with Brent Beardsley, formerly a Partner at Boston Consulting Group. This research was made possible through the collaboration and support of Brent and the Boston Consulting Group. We extend our gratitude to the research, technology, and editorial team who provided assistance: Greg Durst, Jen McPhillips, Jenny Wong, Charles McLaughlin, Michael Rose, and James Ebert, as well as Ariel Cohen, Caleb Nuttle, Spencer Haik, and Cormac Ryan of Bullet Point Network.

These disclosures have been added to this article following its initial publication.