Our research suggests the the power base will finally shift to Money Holders from Money Managers. We see four main ways that global economic, social and political trends are driving this massive power shift:
Rapid technology innovation is generally positive for most money holders and will provide an opportunity to differentiate for intermediaries and money managers . Technology, and specifically the internet, will drive greater transparency, ease of use, and efficiency, while creating new opportunities for funds looking to generate alpha. But technology is neither a panacea nor fault-free, e.g., the 2015 Flash Crash and Bank of New York Mellon’s mutual fund settlement problems. Overall, technology will both raise assets and reduce fees, but it will not be a competitive differentiator on its own. Some startups will target upgrading institutions’ investing process: consider Earnest Research, which analyzes transaction data and other non-traditional data sets for investment research, and AcordIQ, a platform that institutional investors can use to gain better control and governance of funds they are invested in. Other will target individuals: Long Game is turning gamblers into investors.
A slow growth economy has negative impact on most of the asset management industry and is forcing accountability on money managers.
Many of the leading macro investors, including George Soros, Ray Dalio and Vanguard’s Chief Economist, Joe Davis, are pessimistic about global growth outlook. One of the biggest implications for asset management is that underfunded pension funds will have a difficult time meeting their return expectations. Another implication is that the large money managers that collected hefty fees from riding the long term “beta” growth wave in the 80s and 90s will have a difficult time justifying “2 and 20” fees in a lackluster economy.
As women and millennials become key allocators, they create a new group of underserved customers with new unmet values and expectations . Womens’ $14 trillion in assets today is projected to reach $22 trillion by 2020, according to a Family Wealth Advisors Council white paper. Meanwhile, millennials are coming of age in the work force. The new decision makers will expect the industry to reflect both better gender balance and be more accessible everywhere, and will invest in money managers who do not look like Warren Buffett. Internal diversity forces an organization’s members to question their assumptions more aggressively, think more deeply, and are less likely to generate bubbles, according to research by Professor Sheen Levine. Further, these two groups (women and millennials) tend to invest differently than the past generation of older men. According to the Spectrum Group, Millennials, for example, are both more risk-averse and more socially conscious than past generations when selecting investments. In addition, having come of age during the financial crisis, millennials have a negative brand perception of some of the traditionally dominant financial services companies.
Geopolitical risk around the world leads to capital flight to safe havens. Political volatility is typically not good for savers and allocators as it tends to destroy asset value. Regional political instability and the fear of totalitarian regimes exists in China, Russia, the Middle East, and South America, which now have millions of well-educated and newly wealthy citizens that look to protect themselves and their nest eggs. The IMF reports that we are seeing the first net private capital outflows in emerging markets since 1984. For example, according to Bloomberg, money is quietly leaving China at the fastest pace in at least a decade: an estimated $300 billion in financial outflows in the six months through March 2015. This is double the capital ($150 billion) that exited Russia prompted by the Ukraine crisis. Overall, the economic outlook in the US is modest, but the country is relatively stable despite political dysfunction, and remains the most attractive on a relative basis. Just as immigrants streamed to Ellis Island, the wealth of the newly prosperous emerging markets will increasingly seek refuge in the United States, as well as other perceived safe havens such as Singapore and Switzerland.

The Money Manager of the Future

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Based on the problems and global trends uncovered in our research, we outline below the five characteristics that will differentiate the winning money manager of the future (See Picture 5):