Ninety percent of financial markets executives and government officials believe the returns of the past are over, according to an International Business Machines Corp. study.
The study by the IBM Institute for Business Value also reveals that as the financial markets industry radically restructures, firms must adapt to a new lower-margin landscape where they will need to specialize around services that clients value rather than continuing to provide a full range of in-house offerings.
The study predicts significant consolidation in segments wrought with over-capacity such as investment banking, asset management, and wealth management. Enhanced regulation and transparency will also eliminate opacity, with previously high-margin activities becoming commoditized.
The study predicts three specific areas of specialization that are likely to emerge from the new economic condition:
- Beta transactors: the majority of financial markets firms will concentrate on utility services (trading, asset management, etc) that provide the infrastructure required to facilitate market-making in the same way that water companies provide the reservoirs, purification processes and pipes required to deliver clean water.
- Advisors: a smaller number of firms will concentrate on providing advice – such as wealth management or mergers and acquisitions advice.
- Alpha seekers: a handful of private equity firms, hedge funds and boutique investment houses, none of which are ‘too large to fail’, will focus on generating high returns from high-risk investments.
“The three trends – towards specialization, client orientation and improved efficiency – are triggering a restructuring wave on a greater scale then ever before, eroding margins and forcing all firms to reconsider their value propositions and their core business models,” said Shanker Ramamurthy, global managing partner for banking and financial markets at IBM Global Business Services. “The new industry will not only lack some of the great brand names of the past, but will also lack many of its past characteristics – from excessive risk taking, opacity and leverage, to massively high returns.”
