”One summer day, probably in the 1870’s, friends of a major short-seller got together on the shores of Newport, Rhode Island, where they admired the enormous yachts of New York’s richest brokers. After gazing long and thoughtfully at the beautiful boats, the short seller asked wryly, ‘Where are the customers’ yachts?’”
Jason Zweig, in his introduction to Fred Schwed’s 1940’s Wall Street classic, “Where Are the Customers’ Yachts – A Good Hard Look at Wall Street”
If investors complained about Wall Street 140 years ago, they’re howling now.
Asset management is about to go through a particularly dramatic period of disruption, for three reasons. First, the industry is extremely profitable, and excess profit pools attract competition. According to BCG, total 2014 annual industry profits were $102 billion globally, flowing from notably high operating margins of 39%. Second, financial technology venture capital is exploding: CB Insights reports that $19.1b was invested in fintech companies in 2015, vs. $3.9b in 2013. And third, a number of global trends as well as changes unique to the asset management industry are coinciding to force change onto even the most recalcitrant. The technology and social revolution, globalization, the emerging markets’ wealth, the increased role of women, and the millennials’ changing tastes are an irresistible force meeting a moveable object: traditional asset management industry structure.
When we talk about disruption, we are using the formal definition of Disruptive Innovation popularized by Harvard professor Clay Christensen: “an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.” Examples in asset management include index funds (Vanguard); ETFs (iShares); crowdfunding (AngelList); discount/online brokerages (Charles Schwab); and online wealth management (Wealthfront, Betterment). (See Picture 1).
Traditionally, asset management changes slowly. Of the $280 trillion of investable assets globally, approximately 50% (~$140 trillion) is invested in real estate and cash – which were also the most popular asset classes in the 1800s. The next most popular asset classes are insurance and treasury bonds, which were disruptors in the 1600s.