 Matthew Nelson
Director, Market Intelligence
In the first quarter of 2009, Omgeo interviewed over a dozen of our largest U.S. clients, representing all segments of the industry. The purpose of these interviews was to better understand how institutions are coping with the current conditions, how they are planning for the future and to gather their opinions on the future of the industry. Six common topics emerged from these interviews; planning and prioritization, the changing role of operations, relationships, risk and regulation, changing business models and emerging as a stronger industry. This series of articles will discuss each of these topics and our discussions with the participants.
One could argue that the perception of Wall Street is at an all-time low today. The furor that’s arisen over compensation (courtesy of AIG), executive retreats and “lavish” client events has struck fear into the hearts of all bankers. Many are afraid to even ask for approval to attend industry events where there is a very legitimate reason and benefit to their attendance. No one wants to have their firms name on the front page of the paper and face the public’s rage. As a direct result of this, morale on Wall Street has been decimated. Traders, bankers and executives, among others are hesitant to tell their friends and neighbors where they work or even what they do. The turnabout in morale over the past 18 months has been absolute, where prior to this crisis it was a badge of honor to work on Wall Street, now it’s like a scarlet letter.
For this reason, many executives believe that this is a time for insightful thought about the future of our industry. What set of values will we hold as we emerge from this crisis? Prior to this crisis, everyone wanted to work in finance, however today’s M.B.A.’s are looking at manufacturing, pharmaceuticals and other industries for career opportunities, not finance. How will the industry change that perception and start to once again attract and retain top talent? The only way to make this happen will be to reassess the values of the industry and consider exactly what “fiduciary” means to us and how steadfastly we hold to that trust. At the end of the day, we must ask, “how will we emerge as a stronger industry?”
All of the executives that Omgeo interviewed were optimistic about the future of the industry. All believe that it will return to strength, but all also believe that it will be a very different industry that emerges. Everyone expects the current regulatory storm to have a long-term impact. Most interviewees anticipate over-regulation in the short-term; a knee-jerk reaction to the public’s bloodlust. Regulation and compensation challenges are some of the factors that cloud the outlook for the future.
On one hand, some people believe that the layoffs that the industry has gone through will result in a concentration of good talent; clearly if you have to eliminate 20% of your staff, you’re going to try to keep only the best performing individuals. These cutbacks should also promote more automation and efficiency in institutions which are being forced to adopt a “do more with less” mentality. Therefore, when the dust settles and growth returns to the industry, the surviving firms will be able to cope with increasing activity levels more easily without significantly increasing headcount and spending on new technologies.
On the other hand, the concern over regulation and compensation is likely to drive away talented staff, which will weaken the industry in the future. Fewer interns and analysts today will result in fewer directors, vice presidents, and managing directors tomorrow. Those whose outlook for the future is not so strong point to this lack of “bench strength” as a major inhibitor for the industry down the road. They also point to a need to focus on talent today, investing in core infrastructure like human resources and talent management tools to better manage staff, provide opportunity in the firm and ultimately help retain staff.
One thing that no one disputes is that the industry will be smaller as consolidation occurs and attrition sets in. We’ve already seen a number of bulge-bracket broker dealers collapse or get acquired. No doubt there will be a significant impact on the traditional investment management industry; we’re already seeing Barclay’s considering the sale of global top 5 asset manager Barclay’s Global Investors (BGI) with fellow top managers BlackRock and Vanguard mentioned as possible suitors.
Further, it’s believed that the attrition rate amongst hedge funds skyrocketed from 3-5% on an average year, to 15-20% in 2008. In the hedge fund industry, we will see a concentration of assets among the largest managers. Hedge funds won’t disappear; they’ll retrench and seek new opportunities to exploit mispricings in the markets or other investment strategies. It’s important to note that although performance varies widely from firm-to-firm, the average hedge fund outperformed traditional equity benchmarks by 15-25% in 2008. Assets will return to hedge funds, but they’ll be hard-pressed to continue charging the exorbitant fees charged by many managers. Many interviewees believe that hedge fund fees will be forced lower as assets start to return to the industry.
A key issue surrounding the industry’s future is whether or not the lessons that have been learned about risk will become part of the industry’s DNA, or if it is just a short-term response. Many interviewees believe that from now forward, risk control will factor into the decision-making of every successful firm. This is not to say that greed won’t return, but rather that greed and reward must be properly balanced with risk. This balance will be critical to the future of the industry.
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