Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset services. Coming up on today’s podcast is Tim Herron, Chairman of the Investment Advisory Committee at the Presbyterian Church in Canada, discussing how asset management is evolving and the impact on investors. Welcome, Tim.
Tim Herron: Thank you, Murray. I’m honoured that you asked me to be part of this podcast.
Murray Bender: Tim, you have significant experience in asset management. Looking back, how has the industry changed in recent years? And how have investors been impacted by this change?
Tim Herron: I think rather than go into a deep dive of the things that I’ve done in the past, what I would like to say about the industry is it always will be about people. It has evolved and continues to evolve regardless of recession, interest rates or numerical levels of the market.
Historically, we’ve gone through cycles of highs, of lows, of excesses, of shortages, and fear and greed. But paramount to all of this is really the people and the relationship. And you cannot have a relationship with a product such as a stock or a bond. You can’t have a relationship with a service such as a financial plan or even an investment policy statement. But you can have a relationship with the person who provides you with good insight, information and advice.
I think the sophistication of advice has changed dramatically, Murray, as the landscape of products and services has become much more complex. And the level of knowledge isn’t about what the latest numbers are, or the comments or the stories, but it’s how they interpret that information.
I think we’ve spent 40 years watching interest rates fall and fixed income desks have all but disappeared. And when interest rates went from zero to where they are today, everyone wanted yield, and there’s different avenues in risk products that we’ve seen.
So I think what I would say is the specialists that are starting to show up are the ones that haven’t been there for the last few years.
Murray Bender: What are some of the key issues that asset managers face today? And how do you see these issues being dealt with?
Tim Herron: I would say that there’s three key issues that are really on investors’ minds and individuals like me who run either an endowment fund or a pension fund and deal with asset managers out there. Firstly, I think there is the regulatory onslaught and what’s taking place in the regulatory field; secondly is ESG; and lastly is artificial intelligence, or AI. There’s others such as fee compression, reporting, technology. However, I think the first three are the ones that differentiate themselves from the second group.
Whenever we have recessions, or major drawdowns, or financial crisis like we had last year in 2022, the headline news is inundated with where there’s regulators and what was the regulators actually doing. And I think the regulation in the industry these days is a constant with the complexity of new products. And I think that the regulator’s role is to ensure that the products that are in front of people, such as myself, are properly managed and that they don’t cause disruption to the system.
The second one that I highlighted there, ESG, started to be on investors’ radars probably about 10 years ago and, prior to that, it was called responsible investing or even ethical investing. Today, there are many of those who would like to use those three letters to justify an inferior way of managing money. And I think that’s the challenge that we’re seeing out there. And I think it eventually will be codified with acts and regulations and the true stewards of those areas of environment, of social responsibility and governance are going to come to fruition.
Lastly, the key issue that I see that really is going to change the face of this industry is artificial intelligence, or AI. The rapidity of the change really just blows my mind. And since the beginning of the year, we’ve seen the emergence of ChatGPT. We’ve seen Bard, we’ve seen LL. And these are all associated with Google and Amazon and Meta, or Facebook.
And I think what you’re going to see is the efficiency of online security is going to improve and chatbots are going to be involved. But the personal touch may be diminished but is not going to be taken away completely.
Murray Bender: So following up on that a little bit, and looking to the future, from your perspective, where is the asset management business headed and what’s driving this change?
Tim Herron: Pandemic, number one. But really what I think is, is I believe that those companies that invest in human capital or staff with the right tools are probably going to prevail in this highly competitive landscape.
I mentioned earlier fee compression. So we’re having to do more with less. Active management is really a function of people to people. And I think what we’ve seen with the emergence of ETFs, of passive investment for the past decade and even in the past three years is the diminishing of humans. However, I think those that are starting to come back and were able to ask questions and hold managers accountable, and ultimately, that if the strategy goes wrong, at least we understand. That’s the nature of the beast.
And one of the things that I’ve always found out is yelling at a Bloomberg terminal is rather hilarious and is not something that we necessarily need to do.
So I think one of the things that you’ve asked about what’s driving the change, after a decade of falling interest rates, which is easy money, we’ve had globalization, we’ve had political liberalization, we’ve had dampened inflation. I think that the Goldilocks era has changed and has abruptly ended. And I think we’re going to start to see a new world order.
And I think this is going to present opportunities for active managers to demonstrate the value that they bring by drawing on a combination of bottom-up and top-down analysis. And those managers that can inject a deep understanding of whether it’s macroeconomics or financial linkages to their investment decisions, those are going to be the ones that are going to be generating the most value for their customers or their client.
And lastly, I think this drive and renaissance in active management is going to be concentrated from those that start with tone from the top and not from the bottom.
Murray Bender: So talking about the new world order, what advice would you provide to someone who’s just starting out in the asset management business and has to confront this so-called new world order?
Tim Herron: I would start with one thing. One thing is find a great mentor. Really, I think if you identify someone in the industry that you have respect of, that you wish to learn from and enjoy being around, then that really sets you apart and that sets you on your trajectory of your career.
I was extremely fortunate that I had three great mentors over my career. Two of them were those that I learned from what to do in this industry and one was what I learned not to do. And interesting is I still keep in touch with two of the three of them. All of them were great leaders of people. They served those that they led, and lastly, they were people that the industry really respected.
And I think we as human beings need other people to show us skills, capabilities that we never knew that we had. And a mentor is someone who sees us more for talent and the ability that we have within ourselves and helps bring it out on us.
As I said, I’m grateful to those special people that I became and I think I’m a better investor because of it for the church. I’m excited because I look at things in slightly a different way. But I’m also curious. And I think having a mentor allows you to share that curiosity and ask the questions of what should we be doing? What are we missing? And what can we learn from the past?
Murray Bender: So curiosity and mentorship. Thanks for providing some really interesting insights, Tim. We very much appreciate your time today.
Tim Herron: It’s been my pleasure, Murray. Thanks very much.
Murray Bender: For additional insights and topics relevant to corporate investors, including our previous podcasts, visit rbcits.com/insights. I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice and should not be relied upon in that regard. Neither RBC Investor & Treasury Services, nor its affiliates, accepts any liability for loss or damage arising from use of the information in this podcast.