The Future Shape of Asset Management – 1 Year On

A year flies by. It’s been twelve months since I first put together No Ordinary Collision: The Forces that will Shape the Asset Management Industry, a thought piece bringing together many pieces of work and research on mega trends, and which identified particular intersections between emerging trends that could be meaningful for the asset management industry. The aim wasn’t to try and make concrete predictions, or envisage a particular world. But rather to identify and observe trends and themes that might be important – many of which have already been widely covered and researched – and envisage how these might interact to influence the world of finance.

A year can fly by but at the same time it’s fascinating to see how much these trends have developed and thinking has moved on. At the end of last year’s piece I concluded with a checklist of 6 key takeaways for those of us in the industry to best position for the changes on their way. A year later I asked myself the question whether these need updating, but I remain happy that these are still broadly the most relevant themes to focus on.

Download the full document here >>


Key milestones over the last year in Digital / Customer Centricity:


Key takeaways for the future – 

Books – The Checklist Manifesto

A mixture of task & communication checks help manage the problem of proliferating complexity in the modern word – that’s the relatively simple premise of Atul Gawande‘s short, but excellent book on checklists – The Checklist Manifesto.

The book is driven mainly from a medical context, that being the author’s background, and centred around the astounding data from a study supported by the World Health Organisation into the power of checklists. Although the context is broadened to be applicable to many facets of modern life-  examples and applications are also cited from construction, aviation and even finance. The humble checklist can dramatically improve baseline performance – perhaps more so than even the best new drugs or surgical technologies.

Gawande draws a key distinction between two types of error: (1) errors of ignorance (where we don’t know enough) and (2) errors of ineptitude (failing to correctly apply what we do know. Most of the failures in the modern world are of the second kind.

What were the key insights?

Well, here’s a checklist –


Books – The Undoing Project

My beachside reading on the recent winter trip to Australia was the excellent “The Undoing Project” by Michael Lewis.
Obviously when it comes to Michael Lewis expectations are high, both for the quality of the writing and depth of the research behind it. This is no exception. Some of the specific elements are familiar but Lewis does  great job of weaving the intellectual content of the Kahneman/Tversky collaboration into a compelling story about their lives and the contemporary history of the time. Which are plenty interesting in their own right. I’d say the only negative points would be an oddly-placed chapter at the start which rehashes many of the ideas from MoneyBall (it was interesting, just seemed oddly placed relative to the rest of the book) and the slight lack of compete chronological sense of order that comes with the style of hopping around and pursuing digressions. It probably makes the book more readable, to be honest, but I found myself having to go back and review sections to get the full Kahneman/Tversky timeline over the years straight in my mind.
Some of the key behavioural science insights of Kahneman and Tversky that Lewis covers and articulates so well include the following.
Kahneman and Tversky understood that the errors the mind made offered you at least a partial insight into the mechanism behind decision making. A bit like optical illusions offering an insight into the workings of vision.
“Features of similarity” Comparing two objects: the mind tends to make a  list of features, count up and compare the features that two objects have in common, in particular one object with reference to the other. for example Tel Aviv is frequently thought to be like NYC but NYC is not thought to be like Tel Aviv. NYC has more noticeable features than Tel Aviv. An absence of a feature is also a feature. “Similarity increases with the addition of common features, or the absence of distinctive features.
Transitivity in decision making. transitivity violated if someone picks tea over coffee, coffee over hot chocolate and then turns around and picks hot chocolate over tea. The features of similarity model helps explain why people will violate transitivity in this way. The context in which a choice is presented affects the choice. When presented with a choice people aren’t assessing each object on a linear scale and evaluating relative to some representative model of ideality, they are essentially counting up features they notice. but the context in which a choice is presented can have a big effect on the features that are noticeable. for examples two Americans meeting in NY vs meeting in Togo. “The similarity of objects is modified by the way in which they are classified”.
First heuristic – representativeness. When people make judgements they compare whatever they are judging to some model in their minds. How closely do the approaching clouds represent my mental model of a storm? How closely does Jeremy Lin represent my model of an NBA basketball player? It’s why players with Man Boobs don’t get selected in the NBA. It’s not that the rule of thumb is always wrong – in many ways it can work quite well. But when it does go wrong it does so in systematic ways.
Second heuristuc – availability. the more easily you can recall a scenario to mind the more “available” it is, and the more probably we find it to be. For example words starting with K vs words with K as the third letter. Again can often work well. But not in situations where misleading examples come easily to mind.
People predict by making up stories
People predict very little and explain everything
People live under uncertainty whether they like it or not
People believe they can tell the future if they work hard enough
People accept any explanation as long as it fits the facts
The handwriting was on the wall, it was just the ink that was invisible.
Man is a deterministic device thrown into a probabilistic universe
Theory of regret – emotion linked to “coming close and failing”. it skewed decisions where people are faced between a sure thing and a gamble. regret is associated with acts that modify the status quo. The pain is greater when a bad decision led to a modification of the status quo vs one that led to a retention of the status quo. Regret is closely linked to responsibility – the more control you felt you had.
Anticipation of regret is actually as powerful as regret itself. We look at a decision and anticipate the regret we might feel. Often we do not experience actual regret as it is too difficult to be sure of the counterfactual.
This all contravened expected utility theory  (which was a central part of some economic models of how individuals made decisions). Expected utility theory wasn’t just wrong, it couldn’t defend against contradictions. The Allais paradox was a good example that violated utility theory. it basically had two examples framed at different probability levels but with the same utility tradeoff underlying both of them, people chose differently depending on the framing of medium odds vs long odds.
A greater sensitivity to negative outcomes – a heightened sensitivity to pain was helpful for survival. A happy species endowed with infinite appreciation of pleasures and low sensitivity to pain would probably not survive the evolutionary battle.
Prospect theory – people approach risk very differently when it comes to losses rather than gains. risk seeking in the domain of losses and risk averse in the domain of gains. people respond to changes rather than absolute levels. but changes vs some reference point, some representation of the status quo. In experiments this is usually clearly definable, in the real world, not so much.
People also do not respond to probability in a straightforward manner. people will pay dearly for certainty. But they will treat a 90% probability as less likely than that (they do not treat a 90 chance as nine times more likely than a 10 chance). When it comes to small probabilities they do not treat a 4% chance as twice as likely than a 2% chance. if you tell someone one in a billion they treat it more like one in ten thousand – and worry too much about it (and pay more than they ought to rid themselves of that worry).
One consequence of prospect theory is that you should be able to alter the way people approach risk (risk seeking vs risk averse) by presenting problems framed in terms of losses rather than framed in terms of gains.
The endowment effect (Thaler) – people attach a strange amount of extra value to what they own (compared to what they don’t). they fail to make logical trades and switches.
The Undoing Project. The title itself refers to a theory similar to regret: counterfactual emotions, the feelings that spurred peoples’ minds to spin alternative realities. The intensity of emotions of “unrealized reality” were proportional to two things: the desirability of the alternative, and the possibility of the alternative.
Experiences that led to regret and frustration were not always easy to undo. Frustrated people needed to undo some feature of their environment, whereas regretful people needed to undo their own actions. but the basic rules of undoing are the same, they require a more or less plausible path to an alternative state. Imgination wasn’t a flight with limitless possibilities, rather it’s a tool for making sense of a world of unlimited possibilities by limiting them. The imagination obeyed ruled: the rules of undoing. The more items that were required to undo the less likely the mind would undo them. “the more consequences an event has the larger the change that is involved in eliminating the event.” also, an event becomes gradually less changeable the more it recedes in time.

Why a Focus on Personality Matters for a Better Pensions Team

I really enjoyed this fantastic article which featured in the March issue of Harvard Business Review, and explores the Deloitte Business Chemistry model in relation to trying to understand differing work styles and team dynamics. I’d definitely recommend reading the article in full if you haven’t already.


It got me wondering – how might these insights apply to pensions? After all, taking decisions, making progress and enacting change within a DB pension fund involves a huge team effort between trustees, corporate sponsor, in house pensions teams and advisors. In many cases there can be big differences in style and approach between these groups and even individuals within the same group. These differences could derail effective decision making, or they could enhance it.

What is the Deloitte Business Chemistry model?

The Model is based around identifying four different personality styles relevant to teamwork. The purpose of this isn’t to “pigeonhole” individuals but rather to identify a common language that helps everyone understand the differences between them, and appreciate the potential sources of tension (both positive and negative). It also gives some actionable takeaways that you can start thinking about straight away.

I’d encourage you to read the whole article but here is a summary of the four styles:

Pioneers value possibilities, and they spark energy and imagination on their teams. They believe risks are worth taking and that it’s fine to go with your gut. Their focus is big-picture. They’re drawn to bold new ideas and creative approaches.
Guardians value stability, and they bring order and rigor. They’re pragmatic, and they hesitate to embrace risk. Data and facts are baseline requirements for them, and details matter. Guardians think it makes sense to learn from the past.
Drivers value challenge and generate momentum. Getting results and winning count most. Drivers tend to view issues as black-and-white and tackle problems head on, armed with logic and data.
Integrators value connection and draw teams together. Relationships and responsibility to the group are paramount. Integrators tend to believe that most things are relative. They’re diplomatic and focused on gaining consensus.

Source: Harvard Business Review


The challenge in allowing these diverse styles to work together most effectively are the big differences in what energises and alienates each group. For example integrators dislike conflict, but drivers love a solid debate. Also the style in which each group prefers to think and contribute varies greatly: a guardian is likely to want to step through a plan line by line, for a pioneer this might feel quite painful. This has real consequences for situations where differing styles interact.

You’ve probably already recognised elements of your colleagues’ styles in the descriptions above, but what might this mean for running a pension fund?

It’s easy to see how these differing styles might be present around the meeting room of a typical DB pension fund trustee board. Starting with trustees themselves – the connotation of the word “trustee” in English is similar to “guardian” – even though the role of the modern day trustee is much wider than that – and many trustees approach their role with the mindset and style of a guardian (for all the right reasons). They want to see data and facts before taking any decisions that might expose their members to risk, they want to see rigour and convincing arguments in the choices being made in the management of the assets.

All makes total sense – we’re dealing with members’ future financial security here in many cases after all – however contrast this with (say) a “driver” in the chairman’s seat: someone brought in to get things moving, passionate about making progress, changing things for the better, making members better off. It becomes easy to see how these differing styles might cause tension.

Let’s add in the corporate sponsor angle – perhaps a pioneer in the CFO or CEO seat. A natural risk taker who doesn’t like to hear the word “no”, drawn to bold and innovative approaches and focused on the big picture. Sound familiar?

Where are the advisors in all of this? 

The key advisors to the scheme (actuary, investment consultant, covenant advisor, lawyer) will also contribute to the team dynamic, perhaps significantly so, and might have a variety of styles – and this is one area actually where the model opens up some choice. The trustees can choose their advisors after all and if they are aware of the mix they naturally have around the table, then they might want to select their advisor to complement that. Perhaps an integrator to try and bring people together, or a driver to generate momentum alongside the chair. Perhaps it might even help to have different personalities in the advisors – a guardian to represent and appeal to the guardian types around the table alongside a driver.

Without wanting to generalise excessively, it’s my experience that actuarial-types are likely to often display guardian characteristics to some degree (having said that I do know plenty of pioneer and driver actuaries). In some ways this isn’t surprising: careful study, discipline and logic are what gets you through the exams (and probably attracts many people to the profession). Having guardians among your advisers may be good, but might not be the best choice if the trustee board is already guardian-heavy.

The picture is further complicated in those pension funds that might have significant internal teams involved in the management. Perhaps a bold portfolio manager with pioneering anti-consensus views. There might be an integrator in there, or more guardians.

So what?

So the model’s great, but what can we do with it? What actions can we take away in order to help our pensions teams work better together, harnessing the benefits of cognitive diversity rather than experiencing the tensions.

Well, firstly simply having a common language to understand the differing styles within teams I personally find hugely helpful. Being able to depersonalise by saying things like “look, the guardian in me is saying X”, or “the driver in the room would be saying Y” allows teams to lightheartedly explore the differences without things becoming personal or existential, and hopefully without battle lines being drawn.

But there is more than that.

Adjust your style

Once you are aware that you’re a guardian type, craving rigour and logic, working alongside a driver who is committed to progress and getting things done it becomes easier to recognise and adjust your style – perhaps that means going outside your comfort zone to try and get to a decision on a key issue with incomplete data,  being happy working with a bit of ambiguity in an area that can’t be pinned down, or being open to new types of solution that don’t necessarily fit into existing modes of thinking. On the flip side the driver might need to be patient in systematically exploring the data behind the decision to appease the guardians, stepping through details like by line when their instinct is to get it done and move on.

Recognise minority styles 

Making sure that minority groups are represented and have a voice is really important to be productive and is something that can be influenced – for example it’s possible to verbally acknowledge that a group is guardian-heavy and that they need to try and listen to – and be receptive to the perspective of –  the drivers. Rather than playing “devil’s advocate” in challenging ideas, it may be more helpful to “play driver” or guardian. Especially if that isn’t your natural style.

Add to the team carefully 

When there’s the opportunity or need to add to the team, the model gives a clear roadmap for exploring the fit between the needs of the team in terms of personality and potential candidates. In particular it highlights the need to bring integrators to the table, and potentially the need to bring more balance to the driver/guardian split.

Get close to your opposites 

It’ll often be in one-on-one relationships where the real differences emerge and pain-points become apparent. Knowing how those styles opposite to you will react, what energises them, and how they prefer to work will be really helpful. It might involve getting out of your own comfort zone and adapting your style (as mentioned above), but it must just increase the chance of progress being made.
Beware of cascades

Teams with lopsided composition can be vulnerable to decision making biases such as cascades – where the views of those first to speak become echoed by others and grow into a crescendo until they go unchallenged. The key to addressing this is to consciously “elevate” the minority styles on the team – perhaps making sure they are first to speak when it comes to decision making.

These are just some quick thoughts on how this powerful model could apply to pensions. Do tweet me with your thoughts.

2016’s Most Popular 

My most-read blog posts of 2016 were: 

1. Why Anthony Hilton is wrong about DB pensions 

This post, responding to the misguided (in my view) viewpoints of London Evening Standard journalist Anthony Hilton in September garnered by far the most views of any of my blogs this year (around 1400 views). 

An extended version of this article was also featured in Professional Pensions, and also became their most viewed opinion piece of the year

The article must have stuck a chord with readers in the pensions world. We do of course live in pretty challenging times for DB pension funds, with several strong macro-economic headwinds making it harder to deliver the benefits that have been promised. This year saw a vigorous debate around what should, or should not be done to the DB pensions system. This debate was further catalysed by the high-profile cases of BHS and British steel, and the debate looks set to run on into 2017. 

Given the importance of the DB system to the retirement prospects of millions of members I believe a solid debate on some of these important issues is to be welcomed, and look forward to continuing the debate productively in 2017.

2. No Ordinary Collision – the Future of Asset Management

Powerful forces of change are at play in many industries, and asset management is certainly one of them. Technological and demographic shifts will shape the future of the asset management industry, in this piece (April 2016) I discussed some of  the intersecting forces, drawing on a wide body of existing research on the future of work and finance. 

Here are my six key takeaways: 

3. Consulting firms reply to the Work & Pensions Select committee 

In the wake of the BHS pensions story, the W&PSC issued a green paper calling for views on the future of the DB pensions system in the U.K. Given the prominence of this debate and the considerable air-time it’s received this year the responses from the main actuarial & investment consulting firms were considered and insightful. What was also interesting was the diversity of views. Will most schemes pay the benefits promised? Should the role of TPR change? Should there by wholesale change to the system? Will small changes be effective? Is consolidation feasible? These were all questions on which the consulting firms gave insightful, but often differing answers. 
I hope you’ve enjoyed my blog posts this year. I look forward to sharing more in 2017. Sign up to receive updates on new posts.

Why Anthony Hilton is Wrong on Pensions 

“Expected returns don’t pay benefits, cash does”

Anthony Hilton recently wrote a stinging attack on pension consultants -like myself- who advise defined benefit pension schemes to measure, and hedge, their liabilities with reference to gilt yields.

Here’s one (of several) reasons why he’s wrong.

His argument – that you could fund based on the much higher expected returns on risky investments – might perhaps be justifiable in a world where all corporate sponsors were rock solid and would last forever (clearly we do not live in this world – and even then it would expose companies to some needless nasty surprises along the way, but anyway).

However this completely misses the point that a major reason we fund pensions at all is precisely to provide security in a situation where the corporate sponsor ceases to be able to make payments itself. The reason we need to measure deficits is to get a picture of how secure the benefits might be in the absence of the employer, and to take corrective action (eg topping up contributions) if the situation is off-track, before it is too late.

And in those situations of sponsor company failure, we would hit a major snag under Mr Hilton’s approach: it’s hard cash that must be used to secure the benefits – Mr Hilton’s expected returns won’t cut it I’m afraid. Just ask the pensioners of BHS scheme, or indeed the allied steel and wire groups, still campaigning for their pensions over a decade later. This second example pre-dates the Pension Protection fund, so thankfully pensions today are better protected, but the conclusion for scheme funding – that you can’t rely on high future expected returns to discount liabilities – remains valid.

Pensions need to be paid to members in real cash, and it flies in the face of both accepted theory, and common sense, that the amount of money needed to provide these benefits can be reduced depending on the assets held to deliver them.

Today’s unfortunate reality is that the defined benefit system in the UK is on average chronically under funded compared to the benefits it has promised. Time and effort would be far better spent on considering the tough choices that might need to be taken, rather than on attempts to deny the existence of a problem in the first place.

Unfortunately Mr Hilton’s ill-judged remarks from an otherwise respected journalist damage the hard work that many of us in the industry have been doing for many years to try and secure the benefits and financial futures of those members dependent on defined benefit pensions for their retirement.