The Future of Finance: Purposeful Capitalism

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Evolution and the capacity for innovation on a large scale are cornerstones of the CFA Institute’s Future of Finance report. Throughout the four possible scenarios that it envisions on the horizon for the worlds of finance and investment, the CFA predicts revolutionary developments in market forces, communication, social organization, and other areas. These themes of innovation and transformation reappear in the CFA’s fourth and final proposed outcome in which the rise of a new, purposeful capitalism reshapes finance along moral, ethical, and more client-centric lines.

As I discuss more thoroughly in a previous blog post, the CFA analyzes a series of megatrends and posits four scenarios to describe how the financial world would respond: fintech disruption, parallel worlds, “lower for longer,” and purposeful capitalism. In the latter, the CFA suggests that firms will become more conscious of all stakeholders and seek to redefine value propositions by placing more emphasis on trust and nonfinancial considerations.

The impetus for such soul-searching, according to the CFA, comes from a recognition of limits and changing forces. The report notes that as firms acknowledge the interconnected nature of finance—particularly when “viewed as an ecosystem”—they will stress the importance of trust in business and look for ways to demonstrate integrity. Additionally, concerns over systemic issues like resource scarcity and shifting demographics will prompt firms to operate via the principles of sustainable development.

Furthermore, as trust and sustainability come to play a larger role in the financial world, firms will need to find ways of aligning their investment strategies with these values. As a result, pursuing the greatest possible returns or profit maximization may no longer be the supreme goal for many firms who hope to make ethics a key element of their brand or strategy; the report points out the paradox of holding tobacco and health care stocks as an example of this. In fact, the CFA notes that these tradeoffs will represent a large part purposeful capitalism’s development.

Ultimately, firms that embrace purposeful capitalism will pay attention to the needs of broader constituencies that include clients as well as the public at large. Ethical business practices, like the adoption of corporate social responsibility (CSR) or ESG investing, will take center stage at financial institutions, which will also prioritize leadership and diversity initiatives.

To read the CFA’s full Future of Finance report, click here.

The Future of Finance: “Lower for Longer”

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Although interest rates in the United States inched higher earlier this summer, around the world, rates remain low as countries try to spur economic growth. The strategy of keeping rates low in order to encourage growth is not new, but according to the CFA Institute, it may typify the future of the financial industry as continued low interest rates lead to low returns, anemic growth, and a climate of political and social instability.

In a previous blog post, I profile the CFA Institute’s Future of Finance report and it’s four prognoses of how the financial sector may evolve in the coming years: fintech disruption, parallel worlds, purposeful capitalism, and “lower for longer.” In the last scenario, the CFA predicts that perennially low interest rates and other factors—including excessive debt in both the public and private sector and aging populations—combine to prolong the period of weak growth that has followed the global financial crisis.

According to the CFA, low rates will bring about an abundance of global capital and low returns, which will prompt continued intervention by central banks even as those interventions begin to have diminishing impacts. Governments will be largely be unable to respond owing to crippling public debt.

Meanwhile, as average lifespans become longer, corporations and public entities alike will have a harder and harder time meeting their pension obligations, which will lead to pension crises and even pension poverty. This will simultaneously increase pension costs and damage corporate values, further complicating the process of economic recovery and growth.

Under such conditions, the world of finance will respond by deemphasizing innovation since the abundance of capital will mitigate the incentive to develop new products or practices. And while markets may become more efficient thanks to more advanced technology to assist in due diligence and price discovery, they will also become less liquid as capital migrates to fixed assets like real estate and infrastructure.

Financial service providers will also need to cope with a higher level of regulatory scrutiny. The CFA forecasts that lower returns will cause firms to increase their marketing efforts in order to attract new customers; consequently, this will attract a higher level of oversight from regulators and thus additional compliance costs, further shrinking firms’ margins.

To read the CFA’s full Future of Finance report, click here.