Now, more than ever, 2 million people working in financial services are uncertain about their future, watching a convergence of megatrends sweep through the investment world. Traditional practices and business models are being disrupted while interested observers are left wondering how it will all unfold.
These major trends are at the center of the countless variables and predictions trying to make sense of the future for financial services:
- Increasing Consolidation and Decreasing Profits: The entire industry is steeling itself for declining profit margins — advisory fees are getting pushed down and institutional investors are bringing their investment management in-house. Will consolidation continue as traditional business models get squeezed? Major and mid-sized industry players are all looking for the next pivot by changing business models, hiring more specialists, and adding technology to position themselves for the future.
- Fintech: Even though it feels like technology has already wrought big changes, its potential is just beginning to unfold. It has already put investment decisions into the hands of individual investors, and the next steps could open the world of asset management to tech giants with vast Artificial Intelligence resources. The biggest opportunities may lie not in using technology to replace human intelligence, but in applying artificial intelligence to augment it.
- Passive Investment: Increased migration into passive investment vehicles has led some to predict “the end of active management.” Meanwhile, others claim that increasing market volatility offers some of the best opportunities to generate returns through active management. Passive funds accounted for about 20% of all fund investments in 2017, and investment professionals are left wondering whether they are capable of reshaping the entire investment industry.
- Growth of Asia: According to a PwC forecast, Asian assets under management will grow 145% to reach US$29.6 trillion by 2025, far outpacing growth in other regions. Much of that expansion will center on China, particularly if the Chinese government opens the asset-management industry to foreign investors and the country’s massive pension assets shift from banks and bonds to seek better returns elsewhere. Among investment professionals, Asia-focused specialists stand to benefit.
- Socially Responsible Investing: Environmental, Social, and Governance (ESG) considerations may cease being distinct concerns. They could become an integrated part of the investment decision-making process. Meanwhile, under-representation of women in the investment industry’s upper echelons has been a persistent problem; the pursuit of greater diversity will be one of the industry’s most important challenges.
- Trust: After repeated, high-profile scandals that destroy firm reputations, industry leaders are waking up to the need to put investors first. Trust, credibility and principled investment are the new watchwords. In the words of Paul Smith, CFA, “The image of the investment professional who always prospers, whether the client sinks or swims, has got to change.“
Investment professionals will need to adapt to whatever the future may hold. Demand will grow for specialization in areas like financial analysis for specific sectors, countries, and regions. The ability to spot gaps in the market and develop the skills to fill them will be critical.
As noted in the “Future State of the Investment Profession” report from CFA Institute, the sustainability of the financial ecosystem is “dependent on the nature of the value delivered and the quality of trust between the end investor and the organizations involved”. If that can be delivered, then the rest will fall into place.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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