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Investment management is in a period of rapid change, driven by shifting investor preferences, margin compression, regulatory developments and advancing technologies. Patrick Henry leads Deloitte’s investment-management practice in the United States, and he helps Tanya understand how technology, talent, and economic changes may affect investment management firms.
TANYA OTT: Does a look at your investment portfolio make you nervous? Try being the person who manages mutual funds, hedge funds, and private equity funds for individual clients, large pensions, and institutional investors. 2019 is going to be interesting!
I’m Tanya Ott and this is the Press Room, Deloitte Insights’ podcast where we talk about all of the things your business should be thinking about. And today, that’s the investment market. It’s been pretty fantastic for almost a decade, but there’s increasing uncertainty. I invited Patrick Henry on the show to talk about it. Patrick leads Deloitte’s investment-management practice in the United States.
PATRICK HENRY: Obviously, we've gone through one of the longest bull runs in the history of the U.S. market. From a market perspective, it's been fantastic since 2000 and the financial crisis. Investment managers have benefited dramatically with the uptick in the U.S. equity markets, and that has shown a tremendous growth in the world with passive and ETF [exchange-traded fund] growth over the past 10 years. That has been a drawback to the active managers, which may have struggled to outperform the benchmark. But for niche players, really strong players, players with a unique product, they've been able to perform. But overall, it's getting harder and harder, at least in the upmarket that we've had, for active managers to compete with passive-type products.
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TANYA OTT: And we're going to talk about the difference between active managers and passive products in just a moment. But as even people who didn't spend a lot of time taking economics courses or business coursework, we all know that markets work in cycles. So what are you predicting as we move into 2019? What do you think it's going to look like?
PATRICK HENRY: [laughs] If I knew that I probably wouldn't be in this business. I would actually be one of the investment managers. It's interesting. There's a lot going on. We had our pull back over the last couple of weeks with regard to the U.S. equity markets. Maybe, you know, passives might struggle because with benchmarks down, passives might struggle and we might see the active manager come back in.
The one thing I do know—I can't predict markets and if I did, like I said, I'd be doing what some of the wonderful people in this industry do for a living—but what I can say is it's the advent of technology and fintechs [financial technology] that will have an impact. More and more technological advances through 2019 and beyond, are being incorporated into investment processes, into operational functions, into the core aspects of the business, and that’s definitely going to be a trend that's going to continue.
TANYA OTT: And I'm just going to say real quickly the fintechs that you made reference to, that's financial tech firms. Those are firms that are really leaning heavily on digital in order to engage people—on mobile and otherwise—in doing their investments. What are the generational differences that you're seeing? How do Generation Z and millennials think about investing differently than, say, Gen X or baby boomers?
PATRICK HENRY: It’s interesting. I think that—from what I've seen having four millennials as children—a lot more technology-type interfaces, as well the digital platforms and the digital interaction with your customers, is going to be critical. You're going to start to see a significant amount of money transferring from the baby boomers to the millennials. I think the numbers we have is about $15 trillion in the United States alone over the next 10 to 15 years.
And I think they are probably the smartest shoppers generationally that we've ever had. They're very smart in terms of price comparison, so I think price is going to be an interesting perspective, and I think the interaction with a digital platform is going to be critical. I'm not going to say that the importance of a face-to-face financial consultant is ever going to go away. I think we learned that in 1999 during the dot-com broker boom, that the interaction with clients is still going to be there, particularly in the high-net-worth side of things. But I think you're going to need to have a much better digital presence in order to attract [younger consumers] and be able to bring them in and give them information about what they own, what they hold, how quickly it can be turned and what returns are like. So, I think a blend of both are still going to be out there. But I think there will be a continued shift toward the digital interaction.
TANYA OTT: Let's dig into that a little more deeply. How do traditional investment-management firms position themselves to be more competitive with a population that's increasingly leaning on digital?
PATRICK HENRY: There are a number of ways. There are ways to direct the link with your clients, i.e., you purchase mutual funds or purchase funds direct, but most are done through distribution channels, whether it's the large wealth-management firms or other types of distributors around the world. And it's really going to be working with those [firms so] their interaction directly with their clients is digital, user-friendly, intelligent and provides a lot of information. On the direct side, they’ll obviously develop their own level of technology to interact with folks. And then you'll have the folks that are distributing products, that are managing these products on the wealth-manager side. They're going to have to make sure that their platforms are enhanced in order to serve these clients.
TANYA OTT: So the benefit is not only capturing these newer clients – these Gen Zs and millennials—but there are other benefits like being more efficient, saving money, increasing your margins.
PATRICK HENRY: By all means, yes. The digital side will make it more straight through and make it more electronic to purchase and settle a transaction. It'll also help on the back-end of the transaction, in the operational and finance areas, whereby the investment managers themselves will become a lot more efficient leveraging cognitive and RPA, which is robotic process automation, or other means of electronic processing of transactions. That indirectly benefits the client because it brings down the cost of investing overall and therefore hopefully fees will start to come down.
TANYA OTT: As we said earlier, it's been a pretty good run with a really long bull market. But the valuations are pretty high and that means some customers are starting to worry about market volatility. What are the sort of things that you would encourage investment managers to be thinking about when it comes to managing that concern about market volatility?
PATRICK HENRY: That's an interesting one. They've got to have products that meet the client's needs, but have a degree of protection. Education is going to be critical, because the worst thing in the world to do is sell into a down market. We all know that, right, because of the panic-type stuff. It’s really an opportunity to buy, but it’s about educating clients about the importance of long-term investing, that you're not in an investment-management product to trade in and out it on that day. Although some people leverage ETF for that, from an institutional perspective, for the most part you're not going to buy in and out of the mutual fund on a daily basis. It's really about long-term investing and don't worry about short term NAVs [net asset values] coming down. Think about the long term. What is your endgame goal? And there are products that have been developed and are being developed that have target-date-type returns and target-date results that you're looking for. I think it's going to be more about education and leveraging technology to get good information into their hands.
TANYA OTT: When you say tools that use target-date returns, are you talking about things like lifecycle funds.
PATRICK HENRY: Could be lifecycle funds. And there are other funds that are structured that say you're going to retire on X date and therefore here's how we're going to invest for you over these different generational changes in your life. Today it’s going to be more of a higher-risk, higher-return kind of equity, then we might migrate towards a more balanced portfolio as you get older. They’ll continue to rebalance the portfolio based off of when someone will ultimately want to take and have to use those assets in retirement, or for life events or whatever particular need of the client is.
TANYA OTT: One of the other uncertainties is that it's much more complicated regulatory environment right now, particularly as you're looking across the world—in the U.S., in Europe, and Asia as well. What does that regulatory environment look like right now and what do investment managers need to be thinking about on that front?
PATRICK HENRY: Well, it’s complex because when you operate in multiple markets, you’re dealing with different regimes. And you have to have the people to meet the requirements of those respective marketplaces. In the U.S., we're under somewhat of a deregulation cycle. But in Europe, you've got a very, very different regime. And then with Brexit happening, instead of having a pan-European regulatory environment, you’ll have a UK environment, then you'll have the EU environment. And then there’s the growth in Asia. Asia is still an area where regulation by market, the transporting of products, are things that are developing or have just started, like the ability to sell a product that’s registered in Australia across other markets in South-East Asia, or one that’s registered in Singapore and sell it into Australia. So, it's really a matter of just staying on top of it. It’s going to be complex. Having the right technologies to meet the rules [is important] because more and more regulators want to make examples of firms that didn't meet certain rules. Having the right information, the right data, the right people, and the ability to report under the different regimes is going to be critical.
TANYA OTT: We've established it is quickly evolving and a somewhat challenging environment technologically, regulatory, and otherwise. If you were giving investment management folks an action plan for 2019—let's say resolutions for the year—what would be the things you think they need to be thinking about?
PATRICK HENRY: You know, I think mergers and acquisitions (M&A) are going to play a critical role. You're going to start to see some more consolidation and start to look at good partners and product mix, in filling out the whole product mix of the organization. You’ve got to continue your investment in technology. Data, analytics – [those are] going to be a critical aspect for growth. I think you've got to expand your new capabilities, as I mentioned, with M&A, or you’ve got to expand your firm’s ability to deliver products that meet the current and changing needs of your clients. Those can be developed organically within the organization, but I think M&A is going to be a really important aspect of it to fill out the product base. And then, always staying on top of the regulatory regime and what's happening in each one of the different marketplaces. It's going to be critical for you to operate on a global scale. You've got to have the technology [that is] able to report under all the different regulatory regimes and countries.
I also think brand and client service are really, really important. I think a differentiated client-service model, for institutional clients in particular, [is important], because the demands are getting significantly higher there. The need for better information, faster information and more information is critical coming out of the institutional client base. I think you're going to have a very smart millennial generation from a tech perspective, and they crave information. The kids are on their phones every day, craving information.
And you have to have your brand, which is why having a pristine regulatory reputation is critical. [Show] that your organization is looking at new opportunities to invest in companies that are good for the world, good for our environment, and the like. You know, better organizations that make this world a better place.
TANYA OTT: We've spent a lot of time talking about individual investors and the differences between younger generations and older generations. But private equity (PE) is a big part of this picture as well. What are your thoughts on that front?
PATRICK HENRY: Private equity is a significant part of the investment management landscape and it's growing significantly. The desire of companies to go public or to stay public has started to drop, and obviously we've seen a significant drop in the number of public companies in the United States. I think private equities have and will continue to play a big role in that aspect of it. In addition, PE and firms that invest in credit, as well as BDCs [business development companies], are a very significant source of middle-market funding. I think it's going to continue to grow. I think we're going to continue to see a lot more active PE markets as prices come down, as these organizations start to see companies trading for cheaper or coming down in price. We'll see continued growth in the private-equity world and the firms that are within that.
TANYA OTT: Thank you so much for your time today, we really do appreciate it.
PATRICK HENRY: Absolute pleasure.
TANYA OTT: Patrick Henry leads Deloitte’s investment-management practice in the United States, and he's talking about the 2019 Investment Management Outlook. This interview is part of a series we’re doing on financial trends for 2019. We’re talking about investment, real estate and more. You can find it all in our archives at deloitte.com/insights.
As always, we’d love to hear from you. We’re on Twitter at @deloitteinsight (no S) and I’m at @tanyaott1. I am Tanya Ott. Thanks for listening.
This podcast is provided by Deloitte and is intended to provide general information only. This podcast is not intended to constitute advice or services of any kind. For additional information about Deloitte, go to Deloitte.com/about.