”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.