For much of the 20th century, changes to the financial services industry could be measured in geologic time. This all changed with the rise of fintech, which massively accelerated the rate of growth across financial services and changed everything from the way we invest, to the products we invest in.
However, according to Mike Durbin, president of Fidelity Institutional, that change is far from complete. Speaking at the at the 2019 eMoney Summit in Austin, a three-day gathering of over 1,300 professionals, Durbin outlined four key trends that are taking shape right now in financial services.
Trend 1: The Rise Of The “Super Platform”
Durbin noted that seven of the 10 most valuable companies in the world have morphed into platform companies, with whole ecosystems of products that supplement and build off one another. And just like Amazon.com Inc AMZN, Apple Inc AAPL, Microsoft Corporation MSFT, and Alphabet Inc GOOGL GOOG continuously launch products and services meant to undercut each other, the same is happening in fintech. In this way, Durbin said, the financial services industry is mimicking the technology industry.
“Key players in the wealth and investment management industry are positioning themselves as platform businesses, really one-stop shops for customers,” Durbin said. “What's fascinating, and I think pretty well-acknowledged in our space, is that everyone's technology roadmap is beginning to look eerily similar to each other. We all want to build that super platform.
“You can look at FIS, SS&C, Envestnet, salesforce.com, inc. CRM, or even Fidelity for that matter. We all come at it from a different root offering but we’re all aspiring to deliver a similar vision.
Trend 2: Product Rationalization And Personalization
The sheer variety of investment vehicles has exploded in the past 20 years. Where previous generations of investors had limited investment choices, today’s investors have access to a wider range of solutions, such as hedge funds, separately managed accounts, and wrap accounts.
“After introducing so much choice and complexity to the industry however, we're starting to see a pretty good amount of product rationalization and substitution underway,” said Durbin.
Durbin cited ETFs as an example of this trend. Not only are ETFs launching and closing at the same rate, but 80% of ETF assets are held in only 600 products provided by the top three providers: BlackRock Inc BLK, Vanguard and State Street Corp STT.
“That means the remaining 20% of assets are in over 1,600 products from the other 100 providers,” he said.
Durbin said this rationalization corresponds with a growth in managed accounts—fee-based products that are more customizable than traditional investment products. Managed accounts at Fidelity have grown by 100% in the last five years. In response, the company recently announced the Fidelity Managed Account Xchange (FMAX), a managed account platform for advisors that will launch in 2020.
“For much of our business, the future is in managed accounts and this more packaged product. And we're finding more advisors are interested in outsourcing investment management. Many others are still committed to building portfolios, but in between, there are advisors who want to leverage models.”
Trend 3: The Role Of Capital Is Changing
According to Durbin, there are more than 50 private equity firms that are invested in the wealth and investment management space. Venture capital, the cousin of private equity, is expected to hit another record this year for deal size in financial services (Durbin said he expects more than $11 billion of VC investment fintech in 2019, with the average deal size 50% larger in the last 10 years).
“Growth capital allows these fintech firms that we're all competing with in one way or another to worry less about that near-term profitability and instead focus on creating really fantastic products and acquiring clients,” he said.
But the inflow of private capital comes at a cost. “Outside capital can put you and a firm on someone else's timeline,” said Durbin. “It can introduce outside influence that may not be 100% consistent with your firm or your individual purpose and values. Different capital providers have different things on their mind. The magic formula is one that allows for maintaining independence of thought and culture while allowing the capital to support growth.”
Trend 4: There’s A Turf War
Thanks in part to the rise of fintechs, financial services firms are having to grow out of their lanes into other products and services in an attempt to reach the mass market of U.S. investors.
“The more advice that we can deliver into this marketplace, the better things are going to be long term,” he said. “However, it probably does mean as more firms go to get out of their lane, we're going to be bumping into each other as providers as we sort of extend and more deeply penetrate markets and market segments.”
This means that giant incumbents like Fidelity are now competing with much smaller firms.
“So we may have large firms like Fidelity, or small firms like fintechs and other myriad wealth management providers in between, that are all going after these next-generation investors,” said Durbin. “And that can create a little bit of friction in the near term, but we think that the more choice over time, the better it is longer term. Investors are going to select their providers based on a range of factors, and ultimately may different models will win.”
Although Durbin believes these trends are at play right now, he also cautions that this is still a new industry. As a result, there’s a strong likelihood they get replaced by new trends down the road.
“These four trends are not static. These are four megatrends we're watching now. One, three, five years from now we'll probably be talking about other megatrends.”
Photo courtesy of eMoney
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