The Future of Finance: Purposeful Capitalism

by

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

by

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.