Pricing Power (pt. 2) - Intellectual Property - Panoptica featuring Epsilon Theory

The hedge fund titans of the 2000s commanded premium fees because they were perceived as superhuman investors. Today, those same men still exist and still run sophisticated operations. Yet no one believes in their pricing power anymore. Meanwhile, quantitative firms with mediocre recent performance are thriving. The difference isn't talent or results. It's whether the market believes the IP fits the current story about how value is created.

The mythology switched without warning. A decade ago, human genius was the castle wall that justified premium fees. Soros, Druckenmiller, Einhorn, Lampert and their peers were legendary. The narrative shifted, and now the same people operate as "family offices," which means their business models collapsed.
Performance became irrelevant to the story. Quant funds are posting mediocre returns but maintaining assets and pricing power. Discretionary managers posting similar returns are hemorrhaging clients and fee pressure. The investment results are identical. The business outcomes are entirely different.
The zeitgeist is what makes IP defensible. If your intellectual property fits the current market narrative about what matters, it's worth premium fees. If it doesn't fit the story everyone tells about the industry, it doesn't matter how good it actually is. No one believes the castle walls exist.
Client-facing businesses face a different trap. Robo-advisors looked like the solution to margin compression. The problem is they cost north of 400 dollars to acquire each client, and they have zero stickiness. When markets correct, there's no human relationship to hold investors in place. High acquisition cost plus low loyalty is a death sentence.
Depth beats breadth when pricing power matters. Most advisory firms try to use technology to acquire more clients. The actual opportunity is using better conversations and authentic content to keep the clients you have closer and longer. That's where the margins live in a disrupted business.

Comments

fvcabout 7 years ago

Market downturn?

“Run Away! Run Away… :)” {Apologies to Monty Python}

Perhaps a way for robo-advisors to stop knee jerk sell actions by clients is behavioural “nudges” like exit fees or phased withdrawals to keep the investor on track. The problem given past fee excesses by the industry this will look very self serving. Another approach are loyalty bonuses but this will eat margins. Nevertheless, you are right Ben given how much money has flown into passive at the market valuation tops, the next correction will test investor resolve and market liquidity. We might see an “Beast of Caerbannog” asset fire sale spiral in stocks widely held in indices.

Family owned stock with poor free float, not in indices as they do not aid index companies create ETF product or indices, may be better havens when market crunch hits.