Disruption is a powerful word, one that connotes massive and unsettling change for the world’s largest investors. I feel many incumbents in the financial services industry have been on the defensive when it comes to disruption, which has been coming in numerous forms on multiple fronts.
Let’s begin with my premise that disruption is not new in our industry. For example, stock exchanges moved away from paper-based trading decades ago. Algorithmic trading has been a fact of life on equity floors for years as well. Floor traders receded from the scene and more sat in front of banks of computer screens — or the computers did the work for them. Jobs were lost and firms had to reorganise themselves, but most adapted.
I could go on, but in the frenzied discussions around new buzzwords — fintech platforms and venture capital-funded unicorns — disruption is often portrayed as something new. That is not the case. It may feel more intense, but disruption has been a fact of life in our industry for quite some time.
Given his passing earlier this year, I have been reflecting on Jack Bogle’s contributions to our industry. He pushed the industry to change, and he never stopped thinking about ways in which our industry could improve. Jack believed, without any hesitation, that investors’ interests must come first.
Index-based management became mainstream under his leadership. So perhaps Jack was the ultimate disruptor in our field. He was certainly a visionary — and not all of us will live up to his level of genius.
Many look at the rise of indexation as a negative disruptor. But let’s not lose sight of the positives: investors benefit from lower fees, and the rise of indexation has driven costs lower and brought about more transparency. We exist to serve our clients and our investors, not the other way around.
Like indexation investing, no one would debate the disruptive role of financial technology. I believe that the advance of fintech into our world will eventually represent an unalloyed positive. Technology offers us the opportunity to scale, to dramatically improve transparency, and to clearly demonstrate that we help clients achieve their end investment goals. In the same way that the discovery of bacteria and the need for hygiene revolutionised and legitimised the medical profession in the nineteenth century, I believe financial technology provides us with a moment in time of equal importance.
As financial professionals, we must learn to leverage disruption, technological or otherwise, so that we can use it to clearly establish our purpose and our value to our clients and our investors. We should not fear it, nor should we fight it.
Technological disruption is but one source of change. Some other looming disruptions to consider:
- The opening up of asset management in China: It’s an enormous market, with tremendous opportunity. The industry will surely be disrupted in China as the government allows foreign firms to take controlling stakes and to operate domestically. However, Chinese firms intend to take on the world, and they have the strength of a huge internal market to support them, one that is driven by high technology adoption rates. Chinese asset management companies will challenge Western incumbents.
- The developing middle class in India and Africa: The UN estimates that more than half of the world’s population growth will be in Africa by 2050. And we already know the size of the market in India. Emerging middle classes mean more investable assets and investors who can truly benefit from the services our industry has to offer – and in places where the financial system is relatively undeveloped. Again, vast opportunity for new business models.
- The rise of responsible investing/sustainable investing/ESG investing: True, ESG raises many questions around what it truly means, how to measure it, etc. Some think impact investing, some think sustainability, some think climate change, social impact, corporate governance, etc. But however you define it, one thing is certain: investors want more of it. Our CFA Institute research shows 73 per cent of the investors we surveyed take ESG factors into account. I have no doubt that percentage will continue to rise in the years ahead. That represents a true market opportunity.
- Margin pressure. Increasing operational costs (such ascompliance and technology) plus fee competition are driving margins down sharply. Mergers and acquisitions are increasing among asset managers. The big will get bigger and the middle will get squeezed. Those who are not adding true value to clients and investors will disappear.
We live in interesting times. Disruption will continue to change the dynamics in our industry. Most leaders of investment management firms have no special powers to see around corners; few of us are Jack Bogles. Nevertheless, we cannot play defence against these shifting sands of change.
We need to boldly envision a future where client interests are served through a changing product mix at lower margins in new markets – all driven by new technology solutions. Industry participants cannot sit still; we need to innovate and be prepared to be the disruptor ourselves. Above all else, we must embrace the notion that disruption has been with us for a long time and will ultimately lead to the benefit of our clients. Isn’t that what we are all about?
Paul Smith, CFA, is president and CEO of CFA Institute.
Disruption is the theme of the 72nd CFA Institute Annual Conference in London May 12-15.. For more information click here