While new decision-making tools have enhanced investment managers’ ability to respond to client needs, they have also made the investment process more complicated. With the advent of the total portfolio approach, for example, asset mix has become a client decision. As this complex decision is increasingly taken over by the corporate sponsor of a pension fund, or by senior management within an institution, securities salesmen find that the line investment people they talk to are no longer the key decision makers. If securities firms want a hand in the asset mix decision, they must redirect their resources toward improving the interface between intermediary and investor.
Another example of the changes confronting securities firms is the decline in the importance of commission revenues. In the days when they were private partnerships, firms chose to derive virtually all their revenues from commissions or spreads on transactions, rather than sending out bills for their services.
If securities firms are to preserve their role as the very core of the investment process, they must develop business strategies that respond to the changing environment. To halt the recent decline in their profit margins, they must implement budgeting and other management disciplines previously unheard of in the industry. Along with the investment bankers and market makers they have traditionally emphasized, many firms have begun hiring good managers.