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Analysts Theorize on Future of Industry

As fund industry growth slows, investment banking, research and consulting firms are developing theories about what the industry will look like in the coming years.

Industry leaders are either going to be top-tier firms with $60 billion in assets under management, or smaller niche players with $10 billion or less in assets under management, according to a recent study by PricewaterhouseCoopers of New York and Financial Research Corporation of Boston.

"Tier-one groups . . . have the size, scope and market recognition to be industry leaders," the report said. "Niche firms, meanwhile . . . focus on one or two areas that they do best.

"As a result, mid-sized firms attempting to operate in multiple channels are being squeezed. These middle-tier players, who manage between $10 billion and $60 billion, have neither the scope nor the resources of the tier-one firms, but are too big to have the focus and clearly defined competencies of the niche player." The report is called, "Winning in an Uncertain World: A Study of Mutual Fund Distribution Costs and Strategy."

To remain competitive, mid-sized companies may want to consider becoming holding companies of a collection of highly-regarded investment managers, following the model of Nvest of Boston, the report said. PwC and FRC called this the "aggregator model."

"The Aggregator is a firm that assembles a discrete number of highly-regarded investment managers," said PwC and FRC. "It then provides the marketing and distribution infrastructure for these investment managers, leaving them to focus solely on managing money."

Merrill Lynch of New York and Barra Strategic Consulting of Berkeley, Calif. also recently released a report on the future of the investment management industry, called "Success in Investment Management: Building and Managing the Complete Firm." (MFMN 9/11/00)

This report predicted that four business models will emerge in the investment management industry. Leading firms will be distribution specialists, specialized niche investment specialists or financial holding conglomerates. Under the fourth model, they will offer various investments through a single distribution channel. The firms also said that alliances, partnerships and acquisitions will continue at a rapid pace.

Mutual fund complexes and other types of investment firms will have to become more customer-driven with high-quality investment products and tailored service, this study said. The current "proliferation of mediocre products" will not persist because investors will not tolerate it, the study said.