In-house investment teams are in the ascendancy in fund management. Scott Bunny and John Apthorp of recruitment firm B & K Consulting look into the future and ask if the rewards will satisfy these teams.

The debate on in-house management has tended to focus on the costs of external managers and internal teams. This has led to many questions as to what services and asset classes should be brought in-house, the savings that can be made and the ability of in-house teams to generate sufficient returns.

But little has been written of the proposition from the perspective of potential recruits. These are typically people who have gained their experience working for the external providers the funds are looking to replace.

The general perception of the culture of investment management firms is that analysts and managers work long hours under considerable pressure. In return, they are generally well looked after, both financially and emotionally. (Large egos are not unknown among successful managers!) Whilst it is not the main part of their role, they may be involved in marketing for new clients and maintaining relationships with existing ones.

Analysts and portfolio managers are generally well paid and earn significant bonuses. In firms that are not wholly owned by institutions such as banks, many of the senior people probably have equity that has the potential to dwarf their current earnings. The BRW Rich List of 2014 contained the names of three money managers in the Top 200.

How does this compare with what is likely to be on offer with a fund? So much depends on the attitude of the board. In some funds the chief investment officer isn’t eligible for a bonus, so it’s highly unlikely that anyone lower down in the hierarchy would qualify; however, in other funds the chief investment officer is very well remunerated and receives a substantial bonus each year. It is hard to see, though, that equity could be available unless a separate structure was put in place. There aren’t many fund executives in rich lists!

Unless funds are actually going to go out and compete for mandates with commercial managers, it seems unlikely that there will be much contact with clients except in terms of member education initiatives.

For the sake of argument, let us assume that an apparent relative oversupply of analysts and managers enables large funds to establish the in-house investment teams that they need to manage their tens of billions.   What happens five or six years down the track when the performance has been good and money is pouring into the fund? The risk is that the investment professionals assert that all the success is their doing and that they should have equity in the business. This attitude will presumably be in conflict with the fund’s philosophy that it is “run for the benefit of the members”. It also overlooks the contribution of the fund’s brand to the volume of the inflows. The important point is it’s unlikely that the inflated aspirations of the investment professionals will continue to fit within the culture of the fund.

For those of us who have been around for a while, this pattern is familiar. We saw the first independent investment management firms in Australia open their doors in the late 1970s and there has been a continuous cycle of proliferation and subsequent consolidation ever since. In the past the trigger for the formation of new firms has been that parent institutions – typically insurance companies or even banks – couldn’t accommodate the demands of the investment professionals while maintaining the integrity of their culture and pay scales.

It will be interesting to see how the new behemoths of the investment world cope with success in the medium term. The best prospects for happy and continuing relationships with in-house investment professionals appear to lie in ensuring the right structures are in place from the outset, and paying very close attention to the recruitment process.