Cold shower from financial services guru - 20-year transformation of financial services ahead

By Claude Breton | June 20 2001 07:57PM

Washington – Lowell Bryan doesn’t beat around the bush. The Wall Street Journal and Harvard Business Review regular, highly esteemed by his peers, expressed optimism about the future of financial services. But he advises those who prefer the comfort of indifference to fasten their seatbelts: this year marks the start of a period that will push the boundaries of management at financial firms worldwide.

The time has come to shake the status quo. Opening speaker at the ICI industry conference in Washington, Lowell Bryan had barely taken the podium under the scrutiny of the key decision makers of the US fund industry when he cut to the chase: no greetings, no thanks, just the facts, reduced to the bare bones.

“It is important to realize that we are at the beginning of a major transformation. In 2020, a new, more integrated global market structure will have been put in place. We will certainly continue to see massive asset flows in the industry, growth in the business. But asset managers face a more crowded market that will put profit margins under pressure.”

While the industry (led by asset managers) is still posting high returns on shareholders’ equity, many factors will trigger changes, Mr. Bryan forecasts. For one, low differentiation of business strategies between companies. But it’s mostly the tendency of European and Asian cultures to keep global expansion in check that will hinder the largest players.

“It is difficult for US companies to penetrate non Anglo-Saxon markets. Culture and language constitute relatively high barriers. In regulation alone, for example, habits aren’t the same at all. In France, all marketing campaigns have to be approved by the authorities. As for investors, they continue to be conservative, less oriented toward the stock market than North Americans.”

“What’s more, the structure of these markets is quite different because they’re generally dominated by large banks. Over the short term, it would be very difficult to compete with them.” In the meantime, foreign companies are settling en masse on American soil, he noted.

This transformation of the industry is a formidable challenge of adaptation for all members of the financial services industry. But the new environment also offers countless opportunities for penetration, providing companies opt for a winning development strategy.

In this regard, Mr. Bryan sees five potential winning roles in the future: infrastructure specialist (financial transactions), manufacturing specialist, locally segmented distributor, multi-markets and multi-channel firms and global banking/securities firms that can capture economies of scale. Inside each of those categories lie many winning roles, he says.

“Specialized manufacturers, for example, must be experts in each product that they promote. Their success will depend on their capacity to cement their relations with their distributors. Those distributors will extract high rents from manufacturers looking for shelf space.” In general, inter-financing of activities (financing unprofitable activities through profitable sectors) will come to an end, and each business branch will have to demonstrate its intrinsic profitability.

Several industry analysts echoed Lowell Bryan’s views, to varying degrees. Philip Purcell, Chairman and CEO of Morgan Stanley, says that financial mammoths will have to be literally everywhere to succeed. “Capital markets are going global faster than companies themselves. If you want to be a global player, which is our strategy, you have to be in every market and invest heavily. Only a few will be successful.”  He says that Europe and Asia will soon experience an investment boom similar to the North American explosion of the 90s. “Trends in savings will duplicate there. They are 15 years behind in that scope. But you will see rapid growth that will last a bit longer,” he says.

According to the Chairman and Co-CEO of Charles Schwab Corporation, Charles Schwab himself, retail sales of financial services on the global level will be even more difficult than providing institutional services, Morgan Stanley’s strength. The predominance of some cartels and legislation in effect are veritable barriers to expansion of activities. Established for 15 years in the UK, Schwab has extensive experience with these hurdles, he noted.

Consolidation continues

As for business consolidation, the message is clear: everyone thinks it will accelerate. “All trends point to greater consolidation. I think those trends will continue. We are entering a phase where we will see more cross industry consolidation between banks, insurers, asset managers and securities firms,” Mr. Purcell said.

The very high cost of technology will drive some to think about consolidation, Mr. Schwab added.

“We are pretty much at the beginning of that,” agreed Joan Solotar, Managing Director at Credit Suisse First Boston. “The prospects for growth are continuing but slowing. The final driver will be consolidation.”

But at the end of the line, will this wave be profitable? Not according to Michael Goldstein, renowned Chief Investment Strategist at Sanford Bernstein. “Two thirds of the deals will fail. The real winners will be the players that took risks at the right time, putting emphasis on internal growth.”