Posted on

‘A clear-eyed vision is required’: Investment banking at a crossroads

Investments banks are facing a rough time. Stagnant or falling profitability and tough regulation are forcing banks to rethink their businesses. Leaders will need to take “bold actions” in order to transition to a successful operating model, claims a new McKinsey report that outlines key initiatives to help transition investment banks.

“The traditional model of global capital markets and investment banking is no longer an option,” the report states.

The top 10 global banks struggled the most in recent years. The banks reported a combined return on equity of only seven percent, due to rising costs and declining revenues. Most of the lost revenue was in the fixed income, currency and commodities sector.

ficc

Niche or regional players actually gained share, which McKinsey attributes to simpler product sets and business models.

The consulting firm sees a new market structure emerging for investment banks over the next three to five years as economic, regulatory and technological trends play out.

Global full-service players at scale across products and services, which totaled about 10 banks before 2008, will scale back their operations. Only three to five such players will remain. Instead, we will see the rise of focused global players with scale in chosen product bundles, which will total eight to 12 banks.

National and regional commercial banks with strong corporate franchises and investment banking product factories will emerge. In addition, non-bank competitors are gaining market share in a range of product areas, from leveraged loans to boutique investment banking services. These players are not burdened by legacy technology and are able to be more agile than traditional players. Non-bank competitors are expanding into related businesses and are expected to gain more market share.

“Banks should abandon hope of a cyclical upturn and focus on structural change,” claims the report. Better utilization of technology and automation is key in this process to achieve sustainable returns.

“New technologies remain underutilized, and many banks are struggling to make fundamental changes in their operating models and embrace the potential benefits of digitization.”

benefits-of-end-to-end-automation

With a targeted goal of a 20 percent cost reduction, the report emphasizes back office simplification, IT overhauling, migrating to public cloud infrastructure and participating in industry utilities.

The report also mentioned the cost reduction benefits of blockchain technology, including faster clearing and settlement, ledger consolidation, consolidated audit trail, reduction in systemic risk and operational improvements

There is vast potential for extracting new value by using machine learning and advanced analytics to leverage the data that banks hold. Big data analytics can improve decision making and insight generation, as well as drive predictive trade capture and improve reconciliation and root cause analysis. In some cases, using ML and analytics improved bank efficiency by up to 30 percent.

As the new normal sets in, banks will need to change their operations, organizational DNA and culture to make it through. “Across all players, a clear-eyed vision is required and a steady nerve in making the bold moves required for success,” the report concludes.

Posted on

[podcast] Top banker Steve McLaughlin on the future of wealth management

online lending
Steve McLaughlin, FT Partners
Steve McLaughlin, FT Partners

Investment Banker Steve McLaughlin left Goldman Sachs in 2002 to start FT Partners, a boutique investment bank focused on fintech. 2002 — that was definitely before fintech was cool and since then, Steve has played a major role in the growth of the industry. Now, 15 years in and with a team of 70 people, Steve and FT Partners have completed hundreds of transactions in the fintech space.

I sat down with Steve to talk about how fintech has changed over his career, how the industry grew to become cool, and how the interactions between incumbent financial institutions and fintech startups should continue to play out.

Steve’s firm just published a massive research paper on digital wealth management. He’s participated in many of the big fundraisings and transactions in the roboadvisor space, so I was interested to learn about how he sees this industry evolving and whether he expects to see standalone roboadvisors with big businesses a few years down the line or whether digital wealth management is more like a bolt-on feature for generalist asset managers.

Below are lightly edited and condensed highlights from the conversation.

Standalone roboadvisors?

I think for a long time, there’s always room for standalone roboadvisors that go direct to consumer with a slick product. But, I think the BlackRock/FutureAdvisor deal shows that the empire will strike back and arm pretty much every RIA in the country with these types of products and services to service their clients.

Fintech specialization

Investment banking for fintech absolutely requires a specialization. That’s one of the reasons we’ve done as well as we have: there still isn’t a single firm that’s 100% focused on fintech like we are. Top fintech firms that work with larger investment banks typically get a top technology or software banker working with them. Given our experience in the fintech space, when we get hired by clients, we almost instantaneously know what they do, how they do it, who the buyers and investors are in the space. Our completion rate on transactions is 90% — that’s because we can also pick the highest-quality clients, as well.

How fintech has changed

In the pre dotcom-bust era, you had a ton of innovation but the problem was that 1% of people weren’t comfortable with ecommerce, there weren’t smartphones, and encryption wasn’t what it is today, and the models required 5-10X the capital to get off the ground. Many of these companies failed but you did have some successes like PayPal, Checkfree, ING Direct and Capital One.

Between 2002 and 2008, there weren’t too many earth shattering things going on. The big area of innovation then was in the brokerage technology space. You had the New York Stock Exchange moved from guys flashing hand signals around to get trades done to getting wiped-out and becoming fully electronic.

Post financial crisis, we’re in a completely new area of innovation. Millennials have grown up using smartphones, the Internet of Things, and Big Data is changing the world in a much more rapid pace. I don’t think anything is going to change dramatically over night. There will be some companies that create multi-billion dollar businesses but companies of that size won’t change financial services very broadly. We don’t predict the fall of JP Morgan or Wells Fargo any time soon and there will be lots of time for the big guys to catch up.

 

 

Posted on

The future of roboadvisory, as seen by a top fintech investment bank

It happens in every industry technology enters — in big markets like finance, the opportunities are so vast that new disruptive entrants receive a level of hype that way outstrips their current situation. Money pours in, valuations go up and then, as Gartner describes via its firm’s hype cycle methodology, this peak of inflated expectations crashes and becomes a trough of disillusionment.

roboadvisor mentions in the press

2015 was a year of super high hopes for the robos. Standalone asset managers like Wealthfront and Betterment were seen poised to take over the world, set to become the next Goldman Sachs and JP Morgan. Somehow, though, too much lemonade was drunk and everyone seemed to overlook just how hard — and expensive — it is to acquire new customers as a stand-alone asset manager.

If last year was the peak of inflated expectations, 2016 is turning out to be the year that robos get their shit together. Sure, some of the top firms are raising more money and some smaller ones have gotten taken out, but it seems expectations are getting realigned and realistic, as the hard work of building these businesses begins in earnest.

FT Partners, a boutique fintech investment banking firm headed by Steve McLaughlin, has essentially owned the transactions in the roboadvisor space. The firm recently published a 141 page presentation on digital wealth management and we pulled out just some of the salient features for you below.

Robos are next step in passive investing evolution

roboadvisors and passive investing

The story and excitement about roboadvisory isn’t just a tech story — it also has to do with another general trend in investing: the move away from active fund management to passive forms of investing. Over the past several years, money has flowed directly out of actively managed mutual funds and into their lower priced, mainly-indexed cousins, exchange traded funds. Large money managers are abandoning trying to beat their benchmarks and moving their portfolios into passively-managed strategies, as evidenced by the fact that over one third of all managed money is now in ETFs or other index products, up from 20% in 2009.

In The Insider, 60 Minutes’ Mike Wallace interviews Jeffrey Wigand, a Big Tobacco industry insider who turns informant. “That’s what cigarettes are for: a delivery device for nicotine,” the informant said. “Put it in your mouth, light it up, and you’re gonna get your fix.” Similarly, because they’re cheap, easily managed, and ubiquitous, roboadvisors are a great distribution tool for ETFs, and that’s why firms like Schwab and Vanguard have launched different flavors of roboadvisor platforms — to help distribute their own ETF products.

Same technology, different target clients

roboadvisor competition and number of accounts

Roboadvisory is a growing, crowded market. Startups and incumbent financial institutions’ offerings tend to blend together. Some are purely software-driven, while others are hybrid offerings, combining software with a human touch. So there’s not really that much differentiation on the outside packaging.

But when you begin to drill down on the largest players, it’s clear that their businesses are very different. Personal Capital has the highest average account size ($125,900) and Acorns, which, at its core, is an app to encourage millennials to save more, has the smallest account size ($156). Some robos target the mass affluent while others have moved downstream, to collect every nickel and dime its users can spare. It will be interesting to watch the different techniques robos employ to ramp their AUM. Future M&A activity will be very much predicated on roboadvisors’ client makeup and marketing chops.

By the look of things, M&A is just getting started

mergers and acquisitions of robo advisors

Of course, no banking slidedeck would be complete without a recent transactions slide. There have been a number of recent deals in which an incumbent asset manager acquired a roboadvisor. BlackRock, Invesco, and Goldman Sachs have chosen their racehorses by buying instead of building their own. Others incumbents, like Schwab and Vanguard, have built and launched their own robo offerings. FT Partners believes that as more capital flows into the space, there will be more M&A and partnerships to come in the space:

“A number of newer firms are likely to be acquired by larger organizations that are looking to add or deepen their digital wealth management capabilities while only a relatively small number of new consumer brands are likely to achieve the level of scale (and funding) they need to survive on their own over the long-term,” the firm wrote.

Photo credit: Arthur40A via Visual Hunt / CC BY-SA