financial services industry forecast: the perfect storm
TRANSCRIPT
PERFECT STORMY CONDITIONS
The Investment Management industry stands today confronted by an unprece-dented perfect storm of (a) regulatory change, (b) pervasive technological ad-vance and (c) an increasingly risk-shy client base. This is evident both on a global scale, and also more specifically, within the confines of these British shores.
SO WHY THE PLAIN SAILING?
UK fund and wealth managers are not confronting these tectonic shifts in their industry in a sufficiently radical fashion, or engaging in enough close contact with their end-clients.
This is unsurprising given the traditional nature of the UK investment manage-ment industry, along with the relatively strong growth that the industry has enjoyed since the birth of the modern pension fund investing in a range of dif-ferent asset classes, and the take-off of collective investment funds back in the late 1950s and 1960s.
EVERYBODY’S WATCHING THE PENNIES
The UK’s Retail Distribution Review (RDR) is just one example of tighter regula-tion being foisted on collective investment vehicles worldwide. In the US, hedge funds are being confronted by new Dodd-Frank regulation, which is pushing a number of funds to return outside capital to investors as they convert to family office status, with the lighter regulation that this status enjoys.
For investment managers, these added regulatory burdens represent substantial additional cost, putting pressure on profitability. Consequently, many wealth managers are abandoning the “mass affluent” category and concentrating on just the high and ultra-high net worth individual categories of investor.
MADE TO MEASURE
We see this as a key opportunity for entrepreneurial financial adviser networks, self-directed investment platforms and “boutique” investment managers, who can customise their product offerings in an intelligent fashion, providing a “made to measure” investment management service. This fills the needs of the mass affluent investment consumer, that demands more than individual off-the-peg collective investment funds.
After all, we should not forget that a huge number of these consumers are in es-sence lacking the confidence, knowledge and inclination for self-directed invest-ing, and are desperate for a “one-stop shop” investment or finance solution.
A BRAVE NEW WWWORLD
Thanks to the pervasive reach of e-commerce and Web 2.0, investors are more than ever flocking to fund manager-agnostic, self-directed investment platforms such as Hargreaves Lansdown and Bestinvest, lured by the ease of use of their interfaces, their high levels of customer service including access to fund and stock research, and their value proposition (fund discounts, low-cost share deal-ing, transparent costs, one-stop shop for investment services).
Whether wealth managers like it or not, Generations X and Y are very comforta-ble with web-based investing. Easy access to their finances and information driv-ing informed financial choices is thus an essential component of their consumer experience, but one which most wealth managers are struggling to adapt to.
POWER SHIFT
The combination of this transformation of the investment landscape and the im-pact of the RDR are eroding the longstanding power of the Independent Finan-cial Adviser over the typical UK investor.
One of the winners is the online self-directed investment platform. In the US, the effect of multiple mergers of broker/adviser networks has conversely driven the balance of power away from the product provider, the fund manager, to-wards the few remaining broker networks that now control the majority of US households’ financial investments.
SHIFTPOW£R
BRAND: NEW THINKING
Clear, well-defined consumer branding combined with a holistic approach to the investment consumer will become more and more important to the fund man-ager in gaining new business and protecting existing business. Especially as com-petition hots up both from consolidating distribution partners and US-based investment juggernauts with huge marketing budgets.
In particular, a well-integrated digital strategy will be a crucial factor in separat-ing long-term winners from losers.
TWICE BITTEN, THRICE SHY?
The average UK investor in stock funds has suffered two stock market falls of 50%+ since 2000. The pain of these investment losses still looms very large in the memory of the average investor in the 45-65 year old age range.
Little surprise then, that they remain extremely risk-averse today with their fi-nances, largely preferring almost zero-yielding cash deposit accounts and bricks-and-mortar buy-to-let property investments. In the US, retail investment flows into funds other than super-safe bond funds and money market funds have in general been negative over the last five years, despite the poor prospective yields now on offer from government bonds and cash deposits.
DO EXACTLY WHAT IT SAYS ON THE TIN
We see the twin tracks of investor education and clearer differentiation of prod-uct brands in the mind of the consumer as being key to restoring a measure of confidence to the investor.
A key concept to build into these investment product brands is that of simplicity and transparency – in the words of the Ronseal advert, investment products that “do exactly what it says on the tin”. These twin tracks should then permit finan-cial consumers to re-engage with potentially higher-return investment categories such as stocks & shares, commercial real estate and multi-asset class funds.
THINK OUTSIDE OF THE BOAT
The three-pronged perfect storm rocking the boats of investment managers today requires that they commit not just to gradual evolution of their business model and marketing & education strategies, but rather a much more radical redesign of their engagement with their current and potential end-clients.
We see the combination of consumer brand, simpler goal-oriented products, more involved financial consumer education and a 100%-integrated digital strategy as all key shared elements in likely long-term winners in the invest-ment management game.
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