From traditional to scalable and flexible: How this asset management expert is redefining the industry

Wednesday: The Independent Investor

FROM THE DESK OF MILES EVERSON: A flexible workforce performs a variety of functions. It consists of multi-skilled workers that grow or shrink in size depending on a firm's current needs. Nowadays, many employers across industries prefer a flexible workforce because it enables them to adapt to changing marketplaces rapidly. As an alternative to permanent staffing, firms hire part-time workers, independent contractors, and freelancers to conduct project-based work. BC-GUMPS is a great example of how a scalable and flexible workforce can revolutionize even the most traditional and rigid industries like asset management. That's why today, I've invited my good friend, Dave Daglio, to talk about the value of an investment firm that scales its workforce. Dave is the CEO of BC-GUMPS. He is a former-engineer-turned-equity-investor, who is keenly interested in the intersection of human values, behavioral science, and business strategy. Before launching BC-GUMPS, Dave was the Executive Vice President and Chief Investment Officer of BNY Mellon. During his tenure with the firm, he helped design, launch, and manage a unique equity investing approach and the merger of 3 companies to create the 12th largest U.S. Asset Managers with USD 500 billion in assets. These milestones show Dave is truly knowledgeable and reliable in the field of investing and asset management. That's why I encourage you to read his article below as you'll gain lots of new and useful insights from him. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

From traditional to scalable and flexible: How this asset management expert is redefining the industry The traditional workforce approach, which is based on strict hierarchies and rigid job descriptions, can be a hindrance to growth in today's rapidly changing and dynamic business environment. To stay competitive and meet the challenges of the modern market, companies must adopt a more flexible and adaptive workforce model. One of the biggest challenges of a traditional workforce is it can stifle innovation. Employees are often expected to stick to their assigned roles and responsibilities, with little room for experimentation or creative problem-solving. This can result in a lack of new ideas and a failure to take advantage of emerging technologies or market opportunities. The traditional workforce can also be slow to respond to changing market conditions. Since decisions are made by a small group of senior managers or "star" employees, it can take a long time for new initiatives to be approved and implemented. In today's fast-paced business environment, this kind of slow decision-making can be a significant disadvantage. Let's use a traditional asset management company as an example. The asset management industry is no different to any other industries, as having a traditional workforce approach can be a major hindrance to growth, limiting the ability of firms to stay competitive and respond to the changing needs of the market. In terms of function, traditional asset management firms employ teams of full-time analysts with specific skills and expertise. This entails high, constant costs, even when the industry and market do not allow it. To succeed in this rapidly evolving industry, firms must be able to quickly adapt and come up with new solutions. However, with a traditional workforce approach, employees are often limited in their ability to experiment, take risks, and come up with new ideas. This can result in a failure to take advantage of new opportunities and can lead to a lack of innovation. Additionally, this makes it challenging for firms to scale into a new area of research expertise or to shift quickly. I used to find myself asking if I could hire 10 analysts for 6 weeks then let them go once the specific project was over, but I was consistently told “no.” This shows how a traditional workforce approach makes it difficult to attract and retain top talents who are looking for dynamic and flexible work environments. By sticking to a rigid hierarchy and limiting opportunities for advancement, asset management firms may miss out on attracting the best and brightest employees. Other challenges include: Operation, Strategy, and Cost Constraints Worries about longevity and its influence on the revenue/cost balance of company operations slow down management’s response time and decision making, thereby reducing the willingness to take risks or invest in short-term gains. This can result in missed opportunities and a failure to keep up with the competition. Rigid Approaches to Operations Flexibility and high responsiveness are difficult when a company’s nature of work is in everyday investments yet its incentives are not in the right place. This could manifest in the form of not actually focusing on making money for clients/investors but on the stability and profitability of a company’s operations. This rigid business model can also lead to a lack of motivation and engagement among analysts or employees. When they are not given the opportunity to take on new responsibilities, contribute to the company's overall success, or work on innovative projects, they may become disengaged and less motivated to perform at their best. This can result in lower productivity and performance level. So, how can we address these issues in traditional asset management companies and revolutionize them with a reimagined workforce? By implementing a SCALABLE workforce and FLEXIBLE operations. We believe this is the future of many industries, especially those relying on decades-old structures, non-replicable solutions, and complex business frameworks. Additionally, to overcome the limitations of a traditional workforce approach, asset management firms must implement the following solutions: Fewer Operational Constraints This means anchoring analysts and employees on the right incentives and having an easier or shorter time span deciding on which business or market opportunities to pursue. To facilitate quick and efficient decision-making, asset management firms should adopt flat and flexible organizational structures that allow employees to take on new responsibilities and make decisions at the local level. This will help reduce bureaucracy and increase employee engagement and motivation. Systematic Processes, Approaches, and Frameworks This could pertain to the need for a smaller number of core, high-performing analysts or employees, and easy scalability whenever market conditions call for such measures. When an asset management workforce approach is non-traditional, a firm has the chance to lay low and wait for the right and most profitable opportunity, which removes all non-essential fees from the equation and creates the best offerings for clients/investors. The application of the above pillars and approaches is what we’re doing at my new firm, BC-GUMPS. Here, we explicitly define who we are, what we do, and how we approach building a new brand of asset manager, which is focused on bringing episodic investment opportunities to our clients. We bring investment solutions to clients when we believe there is a clearly defined and asymmetric risk-return payoff available within a defined time period. Then, we close those products when we believe performance objectives have been achieved or the opportunity has vanished. At BC-GUMPS, we also believe investment opportunities must meet our 3 specific pillars: Constraints create opportunity. Traditional managers need products that can invest unlimited capital, or for an unlimited period of time. The thing is, no investment wins 100% of the time with unlimited capital. In fact, most active managers underperform passive benchmarks over half the time. At my firm, our plan is to make products available only when they are positioned to win in the given market context, and only at the scale in which they are most effective. No one is that smart. Some of the smartest investors in the world experience losing streaks too. If all it took was intelligence, smart investors would make money forever. However, our belief is that a systematic and dogmatically applied process is more important than intelligence, and that’s why we are focused on creating smarter processes, not smarter analysts. If returns are repeatable, we believe there should be an opportunity to invest systematically through a dedicated approach. If no such opportunity exists, that means we don’t have the right systems in place. Asymmetry isn’t negotiable. We believe incentives dictate behavior, and if one is incentivized to keep finding new ideas to support an evergreen fund, they will keep finding ideas, even if there isn’t asymmetry in the investment. That's why one of our key criteria for investment is we must be able to explicitly define the asymmetry of the opportunity, and why it is present. Without being able to do these things, we won’t understand the rest of the trade and we could end up owning things we don’t understand. Our primary goal at BC-GUMPS is to consistently uncover opportunities that meet our criteria and to effectively build processes that follow the investment plan to generate returns for clients. These criteria were developed from years of experience, and with thoughtful research and consideration. Without these key pillars, we believe we would fall into the same traps as our more traditional peers, whose incentives put them at odds with their clients' objectives. These traditional asset managers gather assets indefinitely and charge their clients into perpetuity, regardless of the skill or value actually provided. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! Have you ever been to the Acropolis? Learn more about an important management-backed tip in investing in next week’s article!