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I’ve been working with a growing number of boutique and name-brand asset managers from Europe, Asia, South America and South Africa who want to offer their expertise and products to U.S. investors.
And why shouldn’t they? The U.S. is the world’s largest investment market, with a seemingly insatiable demand for funds and strategies that tap into undiscovered opportunities in developed and emerging markets.
The AUM potential is strong. The biggest challenges? Figuring out the best way to establish their U.S. presence and build awareness and traction among investors and financial advisors.
If your firm is thinking about setting up shop in the U.S., here are six key issues you need to consider before you make your move.
1. Know your audiences – and your competition
You may have great products with stellar track records. But are they the right fit for U.S. investors? That’s not an easy question to answer. Especially if you don’t have a deep understanding of the different ways people invest here.
In most other countries, investors must use brokers (often employed by banks) and other financial professionals to buy securities and manage their accounts.
In the U.S., self-directed investors can buy individual securities and mutual funds directly through a brokerage account. Or they work with an intermediary such as a commissioned-based broker or a fee-based investment adviser.
Institutional investors have strict due-diligence processes that often makes capital raising for newer managers challenging.
As a foreign firm, you need to understand how to properly market your capabilities to these target audiences, since a “one-size-fits-all” approach not only will be ineffective but will probably get you into legal hot water with industry regulators.
It’s also important to understand where the money is going. For example, over the past decade, index funds and ETFs have been taking the lion’s share of inflows, while all but the best actively managed funds have been gradually losing AUM.
If you’re an active manager, this “passive preference” can put your firm at a competitive disadvantage unless your products are top long-term performers at home – and you’re able to explain, in convincing detail, why they deserve to be there.
2. Understand the regulations
All U.S. based asset managers are licensed and regulated by the SEC. These regulations may be much tougher than those in your own country.
That’s why, when you’re setting up shop in the U.S., your first hires, whether internally or outsourced, should be one or more experienced legal and compliance officers who can make sure you navigate your way through the complex maze of regulations governing every aspect of your firm.
You’ll need to pay close attention to the rules governing marketing and advertising, which fall under the auspices of both the SEC and FINRA, the agency that regulates broker/dealers.
These rules are very different depending on whether you’re marketing directly to investors or to brokers and investment advisers.
Egregious violations of these rules could result in the termination of your licenses – bankrupting your fledging firm before it ever takes off.
3. Figure out how you’re going to set up shop
Most asset managers in the U.S. are established as SEC-regulated registered investment advisory firms. Choosing this approach lets you locate your firm anywhere you want. You can build your own team. And you get to keep the lion’s share of your investment management fees.
The potential drawbacks of this approach? You’re starting from scratch. You may be tempted to simply transfer people from your home office, but it could take months to sort out work and residence permits, help them find places to live, deal with language and cultural barriers, and get them up to speed on the intricacies of doing their job in a work environment that’s completely different than it is back home.
You may get off the ground faster if you transfer only a few senior investment and operations executives and fill out the rest of your team with experienced analysts, traders, backoffice specialists, compliance and legal professionals and support staff.
Of course, it will take time to find the right people and you may have to pay them a premium to take their chances with an unknown firm. You may also need to offer flexibility surrounding working conditions – for example, allowing them to work remotely or on a hybrid schedule.
4. Look for opportunities to outsource
If building out your team in-house is too time-consuming or expensive, you might want to find ways to outsource many of these roles.
For example, third-party technology firms can handle many of your everyday trading, accounting, reporting and backoffice tasks.
Compliance and risk management consultants can make sure you’re always playing by the rules.
Marketing communications and public relations firms can help you develop your web site, marketing collateral and pitchbooks, sophisticated email and social media campaigns and give your firm the news media exposure you need to get your brand – and your thought leaders – in front of the right target audiences.
And third-party marketing firms can serve as your salesforce, leveraging their relationships to open doors for your firm and your products with broker/dealers, RIA firms and institutional consultants.
5. Be patient
Unless your firm is a household name in the U.S., don’t expect quick results. Even if your strategies are top-performers at home, most advisors and investors will need to see at least a year of strong, benchmark-beating performance from your U.S.-based version before they get on board.
During this trial period your initial inflows will most likely come from your home office or from seed capital from friends and family or adventurous venture capitalists or wealthy investors. Here again, a third-party marketing firm may be able to connect you with these first-in investors.
6. Consider partnering with a U.S. asset manager
An alternative to building your business from the ground up is to partner with a U.S.-based asset manager that has strong distribution. That way, you can focus on managing your portfolio while letting your partner do everything else. Their sales and marketing resources can sell your capabilities and raise assets.
There are several ways such partnerships can be established.
You could agree to merge with or be acquired by an existing asset manager whose capabilities compliment yours.
While this approach could be mutually beneficial to both firms, before you sign the agreement it’s important to identify potential cultural clashes that could drive key employees on both sides of the transaction to seek better opportunities elsewhere.
Another option is for your firm to serve as a subadvisor for a U.S.-based asset manager. They could create a new mutual fund that your firm can manage, or you might take over the management of an existing fund that could use an infusion of new talent.
The advantage of serving as subadvisor is that your firm can maintain its corporate independence. You only need to worry about managing money. Your partner can handle all the backoffice, compliance and sales and marketing tasks that aren’t your core strengths.
Of course, you’ll have to share your fee revenue with your partners. And you’ll be under pressure to deliver strong, benchmark-beating results year after year. Your portfolio managers and analysts may need to spend a time speaking to investors, advisors or consultant in virtual and in-person meetings set up by your partner’s salespeople.
But you would have to do all of this anyway, even if your firm was striking out on its own. So, in many cases, the advantages of starting off as a subadvisor outweigh its potential inconveniences, especially if you choose the right partner.
The “right way” is the way that works best for your business
I’ve seen success with foreign firms that have built their U.S. presence from the ground up and with others that have chosen the subadvisory route.
For example, several years ago, a European investment management firm we worked with established their own U.S. subsidiary. They staffed some positions internally, and then worked with us to develop sales and marketing strategy which included finding third-party salespeople. This “hybrid-independent” approach has brought in billions of dollars in assets for them over the years.
Another overseas asset manager we’re working with now is looking for an opportunity to take over the management of an international fund run by an existing U.S. asset manager. Two companies have expressed interest in hiring our client as a subadvisor. If either deal closes, our client could soon be managing $200 million or more in assets in the U.S. Not a bad start for a foreign firm that no one in the U.S. knows about.
The key to successfully expanding your business into the U.S. is to do your homework ahead of time before you make your move. If you don’t have the knowledge or the resources to do it yourself, consider working with a firm that has the experience and resources to help you identify and overcome potential challenges without getting lost in translation.