Financial Services Emerge From Winter: Was it an Ice Storm or an Ice Age?
Posted by Jim Eckenrode, executive director, Deloitte Center for Financial Services, Deloitte Services LP, on February 19, 2014
I'm on a plane as I write this, flying from Boston, where we just dug out from a foot of snow, to Orlando, where I'm really hoping there's none. Lots of weather news around these days: extreme drought in California, polar vortices freezing boiling water midair in Chicago and causing 18-hour commutes in Atlanta. All part of the cycle of seasons, as those of us who have grown up in the north have come to accept. And while the topic of climate change is a hot one at the moment (you should forgive the expression), it's useful to recall a climate-change event from history that really changed the landscape: the Ice Age. Glaciers advanced across much of the northern hemisphere, grinding down mountains and altering landscapes in large scale. When the glaciers receded, depositing rocks, soil and other materials in their wake, the landscape that preceded their advance was changed further and perhaps forever.
Why does this matter? Hear me out: a couple of months ago, the Center team was discussing some of the topline findings from our recently-completed series of Outlooks for 2014 and I was struck by the fact that the various sectors within the industry are headed in directions that could only be described as polar opposites. The reasons for this are inextricably tied to the amount of damage — self-inflicted or otherwise — that these segments experienced from the financial turmoil of 2008 and the regulatory attention they've received as a result. That said, the overarching theme for our Outlooks is growth, which is absolutely playing out for those industry segments that were least damaged and that have enjoyed relative prosperity over the past couple of years or longer. So what we're ending up with is a bifurcated industry, with some firms looking to expand and diversify, while others are streamlining and simplifying.
To cite some specific diversification and expansion examples, we find for one that there is increased competition in the retirement space. The Center released a piece of research last year that identified five major barriers to retirement planning for individuals in the United States. Clearly, this is an important issue that has both industry and broader social implications and many types of firms are developing strategies to address this market. Life insurers are increasing their focus on group annuity products for major private employers looking to transfer their pension liabilities from their balance sheets. And they are not alone: private equity firms are also diversifying by investing in life and annuity players, while at the same time applying their investment management expertise to improve the performance of these investments.
Even within the investment management industry, lines are blurring: between traditional mutual fund companies and hedge funds, as an example. The former are beginning to develop, or partner with, alternative investment firms, while the latter are launching mutual fund-like '40 Act funds as a diversification strategy themselves. New opportunities are driving innovation, competition is heating up and diversification is likely to be the order of the day for firms in these industries that want to continue to grow not only revenue but even the size of the pie.
On the other hand, we find many banks and capital markets firms actively involved in the process of divesting, simplifying and streamlining. Capital markets firms are considering utilities that will perform centralized common functions that they all share but don't need to perform any more. And banks continue to simplify their business models to better allocate precious capital to higher-potential businesses in which they can compete and win. Different kinds of planning and different kinds of competition, exist for firms in these segments that are acclimating to a new environment and a new way of doing business. Consumed by regulatory demand and the need for cost containment, it's a tough business to be in at the moment and while performance is improving, pre-recession returns are but a fond memory for many.
That said, there is innovation happening in these parts of the industry too. To underscore this point, we see that catastrophe bond issuance, which represents an interesting confluence of interest and opportunity between and among investment banks, insurance companies and hedge and mutual fund firms, is at an all-time high. Innovation in the banking space has made recent headlines due to the actions of nontraditional players. Major retailers, telecommunications companies and startups are rolling out solutions that offer a different way. This is not, however, intended as a blanket statement.
To sum up, I'd like to reflect on a question that has been asked in recent years about the financial turmoil and its aftermath: are the changes financial services institutions are going through cyclical or fundamental? To me, it's a bit of both; where creativity is driving convergence and diversification, opportunity has returned, spring has arrived and the cycle is on the way up again. But where firms have emerged to a landscape that has been fundamentally changed, a new approach may need to be followed so that incumbents can adapt to their new environment and find a fresh and perhaps very different, path to growth.
What do you think? Is the industry becoming more diverse with respect to current opportunities and future prospects, or is it simplifying?
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