Viewed as a business, the greatest defect of money management is its unusually direct, multisided exposure to inflation. On one hand, accelerating inflation depresses the market value of client portfolios—the base most money management firms use to reckon their fees. On the other hand, inflation raises money managers’ operating costs, subjecting their profit margins to a double whammy. Money managers are likely to find themselves needing and asking for fee increases at a time when clients are least able and willing to pay for them.

Only by offering investment services the sophisticated client really wants will the investment management firm of the future be able to maintain control over pricing, hence command the financial resources necessary to ensure product quality and customer satisfaction. The need for new products and innovative pricing strategies represents a tremendous opportunity for the firm that perceives its future as a business—not just as an art or science—and that recognizes the value of formal long-range planning.

The successful firms of the future will probably be headed by seasoned business executives, rather than career investment personnel. As the importance of executive management and its related overhead increases, investment management firms may experience a greater proportion of fixed costs. This may accelerate the trend toward acquisitions and mergers, since larger organizations are better able to spread fixed costs.

Such a trend could in turn blur the distinction between the buy and sell sides of the investment management business. Investment brokers may be tempted to enter the money management business themselves, competing with institutions rather than servicing them—especially if commission levels continue to erode or dealer markets in equities become more prevalent.