Evolution In Global Financial Services Part II

By M. Isi Eromosele

By 2015, the flow of capital into new asset classes is likely to drive dramatic change in the following three areas – investment styles, innovation and consolidation and regulation of financial markets.

The shift of capital to new asset classes is likely to affect every part of the capital markets industry. Mass market offerings such as mutual funds will likely be forced to rethink their products and services. At the same time, exchanges are likely to face shrinking margins and pressure to consolidate, driven by two factors: bulk trading, and the need to gain liquidity.

These trends, along with regulatory changes are expected to drive radical changes in the world’s stock exchanges over the medium-term – with the most visible change likely to be the demise of floor trading.

The balance of regulation may be required to better mirror the shifting flows of capital. In the past, regulatory authorities have tended to focus the majority of their resources on traditional financial institutions involved in capital markets.

Institutions dealing in new asset classes such as hedge funds and PE firms tend to be skinny businesses based on a small number of people – tens rather than hundreds and thousands of staff. These savvy businesses leverage technology and the settlement infrastructure of others to enhance operational efficiency.

The challenge for regulators will likely be to adjust their own resources to focus on these extremely high capital intensive firms.

The major impact of new asset class firms is likely to be on the business models of traditional capital markets players. Typically capital markets have tended not to place a significant focus on business models – especially when markets are doing well. Capital markets players will be driven increasingly to use utilities eradicating duplication that currently exists across many capital market players.

Capital market firms may need to inject more of a funds type thinking into their business – to give investors better risk/reward options. Along with this strategy may come the attendant issues of managing risk. This is likely to involve the incorporation of hedge fund and PE-type thinking into current business models. Managing this transition will likely be a major challenge.

Managing Long-Term Assets

Are financial institutions fully prepared for the challenge and impact of an older population? Yes and no. Today, the financial services industry is largely designed to serve customers who are accumulating and holding assets for the long-term. 

It is not designed to serve retiring baby boomers, who will steadily consume their assets over the next few decades. Although new financial products and services are starting to emerge, more attention and innovation are needed. Major opportunities to turn silver into gold include:

• Over the next few years, capital markets are likely to see a large influx of retirement-related funds as people who have neglected their nest egg try to catch up. Clients will likely be particularly interested in products that offer a chance for higher-than-average returns.
• As the global population get older, they need product offerings that address their greater need for short-term and long-term healthcare.
• As boomers get closer to retirement, they need to manage their retirement assets more closely. Financial institutions could act as advisers, helping pre-retirees plan for the future, shifting asset allocations at the point of retirement, capitalizing on the rollover and inheritance boom, helping with business sales/successions, and consulting with clients who find themselves suddenly wealthy.

• Often assets are tied up in houses or other illiquid assets; financial services organizations should innovate to find new ways to help their aging customers release this wealth for their own consumption, healthcare and children but these products should also be seen to be fair by regulators.

Wealth management businesses are already well positioned to benefit from the aging trend; however, retail bankers and insurers have a lot more work to do. 

Few Financial institutions fully understand how to change their business models and business practices to capitalize on these opportunities, and many may spend the rest of this decade trying to position themselves appropriately.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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