The Future of Finance

While many predictions about the future of the financial industry focus on the potential behavior of markets or specific investments, far fewer estimates consider the evolution of market forces and how they will shape the industry. Of course, it can be difficult to identify the specific forces that will leave a lasting impact on the financial world, but understanding those trends in advance can help investors and managers to properly prepare for the future. In fact, a recent report by the CFA Institute entitled “The Future State of the Investment Profession” seeks to do just that by predicting several possible futures for the financial ecosystem based on a series of disruptive forces.

The report outlines six megatrends, which it defines as “large scale changes in circumstances that are omnipresent in all facets of our world,” and suggests four potential outcomes based on how those megatrends may intersect. As a result, financial decision makers can use the report to identify megatrends at work and make a determination as to which scenario of the possible four that they should prepare for. The megatrends are aging demographics, tech-empowered individuals, tech-empowered organizations, government footprint, economic imbalances, and resource management.

The first scenario discussed in the report emphasizes fintech disruption. In this model, new technologies enable the development of new business models, investment strategies, and for entrant firms to compete with and outpace more established institutions. Additionally, the report predicts that the pace of innovation will continually increase as regulatory mechanisms integrate technology, allowing for financial services to become hyper-personalized and accessible to all.

In another outcome, “parallel worlds” develop as different segments of the population engage with society and with financial services differently on the basis of geography, age, and social background. Consequently, members of the various “worlds” will seek different financial products to suit their specific needs and interests, which will lead to increased financial participation and literacy across the spectrum. Although this model does anticipate improved education, healthcare, and communication around the globe, it also accounts for heightened tensions and “mass disaffection” owing to populist and nationalist attitudes.

Alternatively, in a more pessimistic prediction, the report suggests that interest rates around the world could stay low, which would lead to industry consolidation and growth challenges. At the same time, pension costs in both the public and private sectors would rise to pay for pensioners who are living longer as well as to cover diminishing returns from pension funds. Furthermore, a trifecta of geopolitical instability, social instability, and distrust with investment outcomes could combine and prompt the public to lose faith and trust in finance.

The last scenario discusses the rise of a purposeful capitalism characterized by higher ethical standards and attention on a wider range of stakeholders. Firms would more closely align their mission, values, and profit motives, and over time, markets would grow more efficient and fair.

The CFA’s full report is available here.

Positioning Emerging Managers for Success

I saw the latest research analysis by Callan Associates, “Aspiring Managers: Negotiating the Dual Realities Facing Diverse and Emerging Managers,” about the distinct challenges facing today’s emerging managers. Given my years researching and investing with emerging managers, the topic was especially relevant. The extended Q&A features Callan’s Chairman and CEO Ron Peyton and Callan Connects Manager Lauren Mathias. My favorite quote from this research piece is Callan saying that “One last thing to remember is that all managers were once emerging managers.” At the end of the day, we have to back new talent.

In the article, Peyton presents an insightful overview of the “dual realities” swaying the outcome of success for emerging managers, saying:

“On one hand, institutional investors are increasing their interest in diverse and emerging managers as they seek diversity and new talent for their rosters. On the other hand, these managers contend with mounting client demands, distribution limitations, declining mandates, and an overall downward pressure on active managers and management fees.”

Despite several barriers that emerging managers experience when trying to enter the market, they also have a unique “competitive advantage,” says Peyton.

“[They] can be willing to take on more investment risk than established firms because they are more ambitious to demonstrate their talent,” Peyton explains. “An established firm is not going to take a lot of business risk because it doesn’t want to lose what it has. There are two sides to this issue, of course. A small firm can get too ambitious and blow up. But if you pay close attention to governance, have smaller mandates, and multiple diverse or emerging firms, you can spread out that business risk.”

Trends Among Emerging Managers

As for the noticeable trends in the product offerings of emerging managers, Callan’s executives point to “the alternatives side” as one of the greatest areas of growth.  “We’ve noted a lot more direct hedge funds and real estate funds—even some private equity, as well,” says Mathias.

Surely, the subject of emerging managers or diverse managers isn’t new to any of us. Over the years, we’ve heard the media’s assertions that “emerging investment fund managers consistently outperform large and brand-name investment firms, and they do so with less volatility of returns.”

Yet as often as we use the phrase “emerging managers,” there’s a discrepancy about what the  term even means. For some, it’s any new investment firm with a small (under $2 billion) asset base. For others, the term alludes to firms that are owned by minorities and/or women. Callan extends its definition to include disable-owned firms as well.

Peyton, for one, says that he hopes “the term ‘diverse manager’ becomes a thing of the past.”

“That is a very long-term hope and there are miles to go,” he tells the study’s interviewer. “But I think obsolescence of that term is the end game. We are hoping for an industry in which every manager is diverse.”
To read the full Callan Associates research article, Aspiring Managers: Negotiating the Dual Realities Facing Diverse and Emerging Managers, visit