Our mission, as transformation facilitators, is to help financial services organizations determine the extent of change needed from their traditional business processes and proactively walk them down the path to more agile and innovative business processes. That is one of the reasons why we prefer to talk about ourselves as transformation “facilitators” rather than “consultants.”
Hortz: What are some of the major forces that you see impacting the financial services business going forward?
Smith: The first big one that comes to mind is demographic. According to the Census Bureau, 63% of America’s population is aged 47 and below [2013 projections], comprising the segments commonly referred to as “Gen X,” “millennials” and “iGen.” While the latter group is still underage and not spending much time focused on managing their wealth, the other groups make up 40% of our population, a figure more than 50% greater than the baby boomers. Yet it appears that the industry is still very entrenched in designing product solutions for, and focusing on conducting business in ways that appeal mostly to, the boomer generation. We think that the industry risks missing the next wave of investors which are here now! We would suggest that the Gen Xers, millennials and the iGens are all quite different from one another and each one will demand unique and different interactions.
In addition to this tremendous generational impact, America’s investing habits will also change driven by increased diversity. Between the years 2000 and 2010, the Hispanic population in the U.S. grew 40%. By 2060, people of Latin American descent are projected to represent 30% of the total population in the U.S., corresponding to over 100 million people and a larger segment than the baby boomers represent today.
I grew up in Latin America. Historically, there has been a very weak stock/bond investing culture in that area of the world because the majority of the population did not have access to the markets. How do we overcome some of these cultural barriers? Are we building the right products and services for the future? Hiring the right people? The key point here is that we need to distinguish between the urban mythology, the old assumptions and the changing facts, and use those facts to drive our business strategies in new directions.
Hortz: Besides these two dimensions of the demographic issues you describe, what other forces do you see that will drive the need to transform financial services businesses?
A second overriding trend is the “blurring of lines” between the various segments of the financial services industry. In years past, it was all much clearer. Stockbrokers sold stocks and were paid a commission. Bankers lent money. And P&C insurance agents provided coverage for valued possessions. But today, one individual may be playing many roles, sometimes even simultaneously, and it can be next to impossible for the public to distinguish between the roles. This opens up opportunities for outsiders offering a newer value proposition. We have witnessed a flurry of new entrants from outside the industry, dubbed “robo-advisors.” In the second quarter of 2014, almost $300 million of investment capital was pumped into robo-advisors, most of them originating from outside our industry.
A third major force is something that we have dubbed “Better Investing.” As Harry Markowitz’s thesis from his monograph Portfolio Selection evolved into what we now call modern portfolio theory, it grew into an end, as opposed to a means, of investing. Painfully, we learned in 2008 that even a well-diversified portfolio in traditionally applied asset allocation models was not immune to being battered by the economic downturn.
As an industry, we need to become comfortable with “postmodern” techniques in designing products and/or portfolios that fit the client’s changing perceptions, preferences and risk aptitude. Similar to the recent energy industry boom, which is due to new techniques in drilling, such as fracking, we are seeing the advent of new investment methodologies, alternative investments and new ways of working with clients in our industry. For instance, while investing for societal effect is not new, the phrase “impact investing” was coined only in 2009. In that year, the Monitor Institute estimated that a trillion dollars would be invested in impact investments by 2020! When investing for societal impact, clients will look first to where their money is being invested. Many clients are moving away from what I call a “solo performance” mind set, and we need to move with them.
These three major forces discussed will drive major changes in the way financial services providers conduct their businesses and that will necessitate a major transformation from current business practices to more flexible and agile processes that can ride these changing needs and respond with innovation.