This year we are going to see the wave of reconfiguration that has taken over capital markets move into another corner of financial services — asset management.
Consider what has happened at Goldman Sachs over the past 20 years. In 2000, there were over 600 traders in the cash equity business. Today, there are just two – supported by 200 computer engineers.
Ever since the financial crisis, the burden of high regulation and fines and low return on equity have pushed banks to either automate viable businesses within capital markets, or to exit lines of business where the risk/reward profile was not compelling (like commodities). Competitive forces are now forcing banks to reconsider their traditional asset management businesses.
The active asset management business is losing market share to the index providers. According to Bloomberg, “The Vanguard 500 Index has beaten about 70% of funds that buy the stock of large U.S. companies over the past 15 years.”
The trend will pick up momentum given investors’ increasing focus on investment management fees and relative performance. Especially given the rising rate environment; after all, how many active portfolio managers today have managed money in a rising interest rate environment?
High profile investors like Warren Buffett are eschewing active asset management, causing other investors to sit up and take note. Buffett chose to put the money he leaves his wife upon his death into a cheap S&P 500 tracker. Last week at Berkshire’s annual meeting in Omaha, he said many money managers and consultants charged exorbitant fees. The arrangements, he said, “eat up capital like crazy,” so you’d be better off “sitting on your rear end” in an index fund.
At the same time, robo-advisors, offered by long-standing competitors as well as fintechs, pose a further threat to traditional asset management. Indeed, just like full service brokers did 20 years ago when they started offering discount trading online, traditional asset managers are choosing to offer cheap, self-serve robo-advisors themselves. It’s better to cover off all the bases yourself – at the risk of cannibalizing your asset base — rather than see it walk out the door to the competition.
The personal touch will always have a place in personal investment management. But just like with branches in retail banking, the future will be in high-value, low-volume interactions for asset management. Digital-first, data-led firms will be the winners here, as robots and indexes eat away at the market share of active and full service asset managers.