Investment management margins could drop by up to a third as the industry goes through a period of “enormous structural change”, new Russell Investments global chief, Michelle Seitz, told the group’s NZ conference last week.
“After 30 years in the business this is the biggest structural change I have ever seen,” she told the Russell audience.
Seitz said the investment industry was used to operating on margins of about 30 per cent but sustained pressure from low-returning markets, regulators and technology might see that fall to 20 per cent.
“That’s still pretty phenomenal,” she said. “No-one’s going to go broke.”
However, Seitz said the financial services industry would have to strip out costs and layers in an era of low returns. She said with average returns forecast to be in the high single digits at most, historical costs to clients (including advice) of 2.5-3.5 per cent were unsustainable.
“You can’t take a third out in fees,” Seitz said.
She told the Russell crowd in Wellington that the industry needed to “make some tough decisions” involving “creative destruction”.
For instance, Seitz said technology – including blockchain – could make parts of the financial services value chain redundant forcing some firms out of business.
Despite new technology people would remain crucial in financial services, she said, but would operate at their “highest use”.
As well as intermediary businesses falling by the wayside the industry was likely to see fewer active managers in the future.
Seitz said while Russell “believed in active management” the sector was “under duress”
“There won’t be so many active managers,” she said.
Furthermore, Seitz said the “vertically-integrated” business model would also come under fire as the investment and advice industries shifted from a “sales culture” to client-servicing mode.
She said the industry, particularly in the US, was experiencing a crisis of trust where “more people are concerned about going broke than dying”.
According to Seitz, the industry fell broadly into three camps: those who felt an “enormous sense of urgency about the speed of change”; the “oblivious” cohort expecting market “beta” to sustain the status quo; and, the financially secure, aging demographic of managers and advisers “coasting” through.
“I’m in the first category,” she said. “We’re trying to make a better industry [to serve] the end client.”
Seitz joined the Seattle-headquartered Russell as CEO last September from mid-tier investment management firm William Blair in Chicago.
She replaced long-time incumbent Len Brennan who retains a strategic advisory role with the US$270 billion Russell Investments.
In October 2015 US private equity firms TA Associates, and Reverence struck a US$1.15 billion deal with the London Stock Exchange to buy Russell Investments. TA Associates recently took a 25 per cent stake in New Zealand’s Fisher Funds in a joint venture with TSB Bank.