“I think that you will all agree that we are living in most interesting times. (Hear, hear.) I never remember myself a time in which our history was so full, in which day by day brought us new objects of interest, and, let me say also, new objects for anxiety. (Hear, hear.)”
Few would disagree we live in “most interesting times”, most notably with the recent election of Donald Trump as the next US president. The US election result, “Brexit” in the UK, and myriad other challenges have left many in the investment management industry wondering what the future holds.
These challenges were summed up by Virginie Maisonneuve, CFA, founder and managing director of Maisonneuve Global Advisors, at the CFA Institute European Investment Conference: “We have high tension, political risk and a lot of other key facts such as a low growth environment, a low inflation environment. And of course, pressures on fees.” When faced with these challenges, she stressed the importance of remembering the purpose of the investment management industry. “What are we here for? What are we here to do? What is our purpose?”
In a pre-recorded presentation followed by a live question-and-answer session, Maisonneuve said that her purpose “is to help individuals and institutions meet their financial needs over a required time horizon within a suitable risk framework,” a goal that most financial professionals can relate to. One of the ways that she accomplishes this goal is by fostering and building trust. “We need trust from our clients and we need trust in our teams, and our processes.”
— Brenda Childers (@BrendaChilders) November 7, 2016
According to Maisonneuve, investment professionals need to prepare for a future shaped by five key themes that, taken together, make “an explosive combination”:
- Demographics: Maisonneuve believes that a lot of asset managers underestimate the importance of demographics because it is “a slow-moving process,” and long term developments can have difficulty making headlines. But retirement concerns are a ticking time bomb, as the number of older, inactive workers increases while a smaller number of younger, active workers will be expected to support them.
- The low-growth, low-rate world: In her former role at PIMCO, Maisonneuve discussed how a low-rate, low-growth world was “the new neutral.” She believes that this scenario with continue for several reasons. “From a demand standpoint, from a pricing standpoint, and then from this disruption standpoint, through technology, growth will remain lower for longer,” she said. This will make it more difficult for financial professionals trying to match long-term liabilities with traditional long-term bond investments.
- Disconnection in a connected world: “The impact of the move from the Cold War to the post-Cold War has been very beneficial to global growth and, generally, to globalization,” Maisonneuve said. However, she feels that the market has underestimated the fact that this global, interconnected world will have to deal with sharp, unexpected adjustments through “fat tails” in the future that will have far-reaching effects. Maisonneuve cited the examples of Brexit and the potential for conflict in the South China Sea. If the current global institutions are ill-equipped to deal with further geopolitical shifts, “you will have more disconnection that will surprise the market.”
- Regulations and technology: “I think more burden from regulation is what we should expect, more cost,” Maisonneuve said, especially for global asset managers who will need to comply with multiple regulatory regimes. These compliance efforts will make it more expensive to provide service to clients. Clients are also expecting firms to offer enhanced technological capabilities, such as wider availability and access to investment data, which will be “probably a better experience for the client, but definitely a higher cost to companies.” Additional expenses will be incurred by taking steps to protect client data from heightened cyber threats.
- Margin pressures: Although costs are increasing, investment managers are losing their ability to command high fees. Clients are turning to passive investment products and automated financial advice, which train them to expect performance at a discount, while new competitors are threatening to capture a larger share of the market for active management. According to Maisonneuve, the “capital intensity profile of our industry is actually quite attractive for banks and insurers” — entrants that would already have systems and processes in place to address the cost of meeting technological and regulatory requirements.
In spite of these challenges, Maisonneuve sees reasons for optimism. Firms can thrive in this new landscape by embracing a culture where they are aligned with their clients’ needs, and by clearly demonstrating the value that they are adding to the investment process. “I think the whole Black Box model of ‘Trust me, I’m good,’ that model is gone,” said Maisonneuve, “and clients will demand more proof.”
— Will Goodhart (@WillGoodhart) November 7, 2016
Investment professionals who can prove that they are consistently putting investors first should remain in high demand.
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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.
Image credit: Courtesy of Martine Berendsen Photography