The future of investment management
Areté’s strategic view of the investment landscape envisions a future in which the next 30 years is likely to be very different from the last 30. As a result, it will be imperative to re-evaluate investment approaches and service providers in order to avoid those that are poorly suited to the new environment and to identify those that will thrive in the new surroundings.
Where are we coming from?
Declining interest rates since the early 1980s have created strong market returns for both stocks and bonds. Participation in capital markets also increased substantially during this period. The combined effect of these forces was to create an almost perfect environment for growing assets.
Under such amenable conditions, investment firms often grew rapidly. In the process, many de-emphasized managing their cost structures and instead prioritized growth over efficiency. This business tradeoff was largely facilitated by the strong returns investors realized. As a result, unlike in virtually any other industry, consumers of investment services have remained fairly tolerant of the industry’s inefficiencies.
What will be different?
Although the industry has been evolving, many investment firms today are essentially artifacts of a largely bygone era - well suited to growing assets in a friendly, stable environment, but poorly suited to helping investors navigate a challenging investment landscape comprised of complex systems. A significantly different landscape will demand significantly different investment firms. One very reasonable vision of a new investment paradigm identifies key areas of change:
Where are we coming from?
Declining interest rates since the early 1980s have created strong market returns for both stocks and bonds. Participation in capital markets also increased substantially during this period. The combined effect of these forces was to create an almost perfect environment for growing assets.
Under such amenable conditions, investment firms often grew rapidly. In the process, many de-emphasized managing their cost structures and instead prioritized growth over efficiency. This business tradeoff was largely facilitated by the strong returns investors realized. As a result, unlike in virtually any other industry, consumers of investment services have remained fairly tolerant of the industry’s inefficiencies.
What will be different?
Although the industry has been evolving, many investment firms today are essentially artifacts of a largely bygone era - well suited to growing assets in a friendly, stable environment, but poorly suited to helping investors navigate a challenging investment landscape comprised of complex systems. A significantly different landscape will demand significantly different investment firms. One very reasonable vision of a new investment paradigm identifies key areas of change:
|
Old paradigm
Performance Risk exposure Wealth accumulation Justify AUM growth |
New paradigm
Outcomes Risk mitigation Wealth preservation Manage capacity growth |
-Lisa Shallet, Bank of America Merrill Lynch, “Changes underway in wealth management”, CFA Society Philadelphia High Net Worth Conference, 12/1/2011
In other words, a lot of things will be different. Different conditions demand a different playbook and many of the most successful investment firms of the next 30 years are going to look a lot different than those of the last 30 years.
Key drivers
The confluence of new technology and new consumer behaviors can, at various times, drive significant changes in business patterns. Notably, the proliferation of relatively cheap internet access along with the vast amounts of information it provides access to has changed the behavior of consumers who are now far more likely to conduct research on their own for important purchases. While companies like Amazon have significantly disrupted many business models by structurally eliminating inefficiencies, the investment industry has remained oddly insulated from this powerful trend.
This is unlikely to persist. Easy and cheap access to information reduces operating costs for investment managers and this should be reflected in management fees. Easy and cheap access to information on investment service providers also facilitates substantial consumer research and this should obviate the need for many costs related to marketing. Finally, amid a landscape of high levels of debt, subpar economic growth and largely underfunded retirement plans, there is likely to be a significant economic imperative to search out not just highly skilled, but also extremely efficient, investment service providers.
Implications
The investment landscape that fostered most of today's investment firms is likely to be quite different in the future. Insofar as this is the case, incumbent firms are likely to have strategies, cultures, conventions, and behaviors that will be substantially at odds with the new environment. Some may be able to adapt, but there is good chance many will not. As a result, there will be a need for a new breed of investment service providers that are purpose-built for a new and more challenging environment.
In other words, a lot of things will be different. Different conditions demand a different playbook and many of the most successful investment firms of the next 30 years are going to look a lot different than those of the last 30 years.
Key drivers
The confluence of new technology and new consumer behaviors can, at various times, drive significant changes in business patterns. Notably, the proliferation of relatively cheap internet access along with the vast amounts of information it provides access to has changed the behavior of consumers who are now far more likely to conduct research on their own for important purchases. While companies like Amazon have significantly disrupted many business models by structurally eliminating inefficiencies, the investment industry has remained oddly insulated from this powerful trend.
This is unlikely to persist. Easy and cheap access to information reduces operating costs for investment managers and this should be reflected in management fees. Easy and cheap access to information on investment service providers also facilitates substantial consumer research and this should obviate the need for many costs related to marketing. Finally, amid a landscape of high levels of debt, subpar economic growth and largely underfunded retirement plans, there is likely to be a significant economic imperative to search out not just highly skilled, but also extremely efficient, investment service providers.
Implications
The investment landscape that fostered most of today's investment firms is likely to be quite different in the future. Insofar as this is the case, incumbent firms are likely to have strategies, cultures, conventions, and behaviors that will be substantially at odds with the new environment. Some may be able to adapt, but there is good chance many will not. As a result, there will be a need for a new breed of investment service providers that are purpose-built for a new and more challenging environment.
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