Competitive streak
Firms are using information and communications technology to develop better and cheaper products in order to remain competitive.
The names of star managers and star firms come and go but if you stop performing, you do not last long.
There are three broad areas of innovation: in research, execution and in client service. In research, big data and computer processing power allows researchers and investors to seek new ways of beating the market.
In execution, the speed and breadth of modern communications technology allows trades to be executed more quickly and at tighter spreads.
It allows investment management to outsource all non-core elements of their business to administrators who can bring scale benefits to the business of settlement, accounting and so on.
Finally, client service is improved out of all recognition. It is possible to give clients extensive, sophisticated real-time reporting on their portfolios.
Adapt for change
All this is good for clients and the broader economy. According to long-term research, the cost of financial intermediation – moving money from savers to borrowers; from capital surplus to capital deficit agents – has been a stubborn couple of hundred basis points.
There is no reason to believe this pressure will dissipate. The big question for industry participants is how to adapt to this, how to take advantage of the efficiency savings and gains, and how to innovate in their own businesses.
Those who wait for the pressure on fees and costs to pass will be disappointed.
