Others have already written extensively about some of the trends that are rippling through the investment management business (most recently in a terrific pull-out that The Economist ran a few weeks back), so I won't belabor those points. But suffice it to say that the fund industry is at an inflection point in some ways.

For instance, investors are increasingly shifting from accumulation phase to spending phase, with all of the attendant risk to asset managers more-accustomed to helping customers grow, rather than expend, their wealth. The rise of open-architecture and the toppling of vertical, proprietary-selling models (think: pushing house-label mutual funds through a captive brokerage force) places managers in a position where they either perform or, in distribution terms, perish. And the emergence of numerous low-cost sources of market exposure (i.e., ETFs) is turning the screws on asset managers who heretofore rode the market's tide, charging upwards of 100 basis points for the pleasure.

That litany might make me sound like an investment-management Cassandra. In reality, I still think asset management remains, by any non-vulgarian standard, a terrific business: It's handsomely, handsomely profitable once scaled (and, certain variable costs notwithstanding, provided a manager is willing to lift its snout from the compensation trough, it scales sooner than you might think). And you'd be hard-pressed to find many businesses that can grow internally at a mid-to-high single digit clip without the benefit of major capital expenditure. Yeah, there's a certain danger inherent in an intellectual capital-centric business, where failure to stroke egos or preserve a firm's finicky culture can tear a shop asunder. But the economics compensate for it, and then some.

Yet, growth isn't going to be the lay-up it once was. ETFs and alternative investment managers-products that sit (or, in the case of hedge funds, profess to sit) at the alpha-beta continuum's opposing poles--are taking share from fund managers, active managers in particular. Were it not for so-called "outcome" products like target-retirement funds, which have sopped-up a huge share of inflows recently (thanks in large part to fund companies' stranglehold on retirement plans), the picture would not be pretty. Yes, there have been notable exceptions (Growth Fund of America, certain natural resources, foreign funds, etc.). But flows have been heavily concentrated, with the Vanguards and American Funds of the world gathering the lion's share of assets.

What's striking is that these are very low-cost providers. Further, generally speaking, they've provided a good outcome to investors thanks to consistent performance and judicious product development (i.e,. not chasing the hot-dot and burning performance-chasing investors in the process). That, in turn, has engendered loyalty and stimulated additional business. T. Rowe has also benefited hugely from this trend, with its balanced line-up, strong reputation, and lustrous brand winning it lucrative retirement-plan assignments, which it has parlayed into hefty flows into its popular Target Retirement series of funds. Dodge & Cox is another exemplar of the 'doing right, doing well' ethic.

So what's a non-incumbent firm to do in the face of these challenges? My vote: Adopt an expense structure that levies modest fixed management fees and substantial performance-based fees.

We explore the topic in further detail in several other installments, which I've added as separate postings:

• Benefits of Performance-Based Fees
• Aligns firm with success of strategy
• Promotes good research and product development
• Removes disincentives to close strategies before capacity gets out of hand
• It's cheaper to the client
• Forces fund companies to reckon with the way they define "management fee"
• Differentiates funds from other investment products
• Implementation Questions
• How would the fee arrangement work?
• Are performance fees the answer in every situation?
• Does it encourage reckless risk-taking?
• Isn't the backwards-looking nature of performance fees a fatal flaw?
• How do you keep investors/fund companies from circumventing the fee?

While this is pretty wonky terrain, I think it's very meaningful to investors' long-term success. At very least, I hope you find it thought-provoking.