When most people think of “finance” they think of Wall Street banks, and the people who work in them. It means something different to me. I toiled for a decade or two at the marketing and manager research end of investment management, an industry that originally formed around mandates from pension funds, endowments and foundations and other major institutional pools of money. Allocations from these clients tended to be (barring underperformance or other errors) fairly stable, and the tone of the industry reflected that fact – it was still overpaid, but not as crazy as Wall Street, and people were generally lifers.
When it became clear in the 1990s that the institution of the pension fund was in serious trouble, the industry turned to defined contribution assets and international expansion as sources of growth. Neither of those has turned out well – the average DC balance is in the low five digits, and even then it’s not a profitable business unless you are either the owner of a recordkeeping platform (a la Vanguard and Fidelity) or willing to cut off your left arm to be on one. As for international, the advent of the “portable” European UCITS structure (one that could technically be sold anywhere in Europe) may have helped managers with cross-border sales, but still runs smack into the basic truth that local distribution – in the local language, using locally relevant material, and through an expensive local sales force – is still a necessity. Worse still, local banks and insurers (and my favorite euro-word, bancassurers) already have dominant distribution channels, necessitating giving up your second arm to get on to their platforms. While some managers have managed to make each strategy work, the list is very small compared to the number who have tried.
The more recent hot dots don’t seem to be working out so well either. Hedge funds and private equity have been much more successful in gathering assets than they have (on aggregate) in delivering returns, and seem to have shifted market power to a smaller and smaller number of firms, each of which tends to have far fewer employees than traditional firms of similar size. More recently, the rise of “goal-driven” strategies that target specific outcomes (rather than simply delivering total returns) have been touted as a possible growth area. But as a friend who works in the industry pointed out to me today, one of the most promising – LDI, a strategy intended to immunize a pension fund from future liabilities using a single portfolio of high-quality bonds – is basically an end game in terms of business since the portfolios are meant to last until the fund is spent down. You don’t exactly get replacement mandates on a regular basis.
All of which leads me to think that traditional investment management is just one more area that is in the process of shrinking rapidly. The seemingly obvious analogy is to the industrial sector, but that’s inapt here because there is no profit-driven outsourcing or off-shoring – the market is simply shrinking. This is hardly a tragedy in the grand scheme of things, though I also know plenty of people who are struggling to find work now that the industry has changed from a garden to Survivor Island. The far more troubling factor is the reason for the change, and the likely effects. With employers free to drop pension funds, and individuals unable/unwilling (or some combination thereof) to save enough for their own retirements, the sunset decline of this industry will be nothing compared to the emergency financial needs of the tens of millions whose retirement assets it once managed.