For as long as I can remember, I have made an annual visit to the Museum of Fine Arts in Boston to appreciate the artwork on display. The variety of ways the artists express themselves is fascinating but there is one artist that has always made a notable impression on me. Stand too close to one of Claude Monet’s masterpieces and the painting appears to be a confusing array of colors representing no discernable image. It’s only when stepping back that you see how each dot of color is interconnected to form something more meaningful.
There is a corollary here to working in the investment world. Often our day-to-day activity has us busy focusing on the issues that are closest to us while blurring the greater meaning behind our efforts. Stepping back offers a vantage point to appreciate the bigger picture and gain a deeper understanding of what needs to be done to remain viable and competitive. The investment industry is an ever-evolving canvas with the painting being created by the demands of the investing masses. Upon stepping back to look at the whole picture, we can better understand what the artist is conveying and what we can do about it. Looking at the big picture for 2018, I see the following themes ready to be addressed:
The boardroom needs more technology leadership
It is no secret that technology drives almost everything we do in today’s world. What is surprising though is how underrepresented technologists (those defined as holding a position of CTO or similar professional technology background) are within the boardrooms of our largest financial institutions. According to recent studies, out of approximately 100 banks globally, less than 8% of board members have technology professional backgrounds and only 3% of CEOs do. Remarkably, less than half of the banks don’t have any board members with a professional technology background and about one-third have only one board member that fits the mold. While North American banks fare better with around 12-15% of board members having technology backgrounds, what is clear is that the industry needs to adapt fast. Fintech, AI, and robo-advisory platforms are making inroads in re-defining the value proposition of these institutions. The competitors are all technology-first companies and if the investment industry doesn’t start operating more like their Silicon Valley contemporaries, they risk becoming less relevant over time. Technology expertise is a must in the boardroom.
Client experience needs to be viewed as an opportunity for growth
There is now more wealth among women, minorities, and millennials as a percentage of the overall investment pool than ever before and they are demanding more from their investment experience. This has created a tremendous opportunity for those that do it well and create a meaningful connection to their brand. The Sprinklr Business Index, which measures and analyzes the breadth of public interactions between brands and consumers across social media, has tracked the top financial institutions doing it well. At the head of the class is Capital One which has completely innovated the investment experience with banking cafés and personalized digital UIs that allow customers to easily invest in its product mix (see 5 Finance Brands that Lead in Social Media Marketing). The bank receives 92% positive sentiment from audiences about its posts. It has even developed a partnership with Spotify, the music streaming app, to offer discounts for its users. Innovative financial companies like Capital One are landing new customers at an alarming rate compared to its competition. Investment companies need to start measuring their success based on landing new customers and not just increased contributions from their existing customer base. The bottom will hollow out on investment managers, financial service providers, and banks that fail to create a differentiated digital user experience.
It’s time for fund managers to change their investment fee structures
As currently designed, the system is “heads I win, tails you lose” in favor of the money manager. To illustrate, take your typical hedge fund that charges an investor a 2 and 20 fee structure. Essentially, this is a 1–2% fixed management fee to run the operation and a 10–20% performance fee of anything in excess of a predefined hurdle rate (see Institutional Investor’s article No 2-and-20? No Problem for more information). In theory, you could have a great year and pay the money manager a big performance payout in year one only to incur big losses and lose all those initial returns in year two due to an adverse market or worse—poor fund management. In this scenario, the money manager still retains all the performance earnings from the prior year and has no responsibility to pay back the investor for poor performance realized in year two. Money managers should be paid out performance fees over a 3-4 year vesting period with compensation adjustments being made up or down based on performance for subsequent years. Investors are happy to share the prosperity with money managers but shouldn’t money managers do the right thing and share the losses too?
There likely has not been another time in the finance industry’s history where so much potential is on the horizon (see our blog Preparing for the Tidal Wave of Innovation). The canvas is changing and the investing public is demanding a new picture. Establishing leadership teams with the appropriate technology backgrounds, making the digital user experience investors crave a reality, and getting aligned with investor interests through fee re-structuring are all colors on the palette. It’s now up to us in the industry to paint this new reality; I think we would all be surprised at what the new masterpiece would be worth.