Viewpoint : Market evolution : Mathieu Ghanem

GENERATION Z WON’T NEED YOU!

It is less than six months to Brexit, the volume of transactions in Bitcoin is now larger than PayPal and two US tech giants have passed the one trillion market cap level – but the real concern for brokerages and wealth managers should be ‘Generation Z’, says Mathieu Ghanem, Managing Director, ADSS Head of Global Sales and Marketing

As CEOs and boards of investment firms look ahead to the year-end and plan for 2019 they will be assessing market fundamentals, the tangibles and intangibles, but for many the real question is whether they are still relevant to, and can provide the services, their clients want.

For the last 10 years we have seen an exponential rise in passive investments with very large funds building their businesses based on a wide variety of Exchange Traded Funds (ETFs). Helped by the growth in personally managed pensions, an approach which has spread from North America into Europe driven by regulation and national policies, the funds have attracted trillions in deposits.

ETFs have led the democratisation of market data and trading. It has created awareness in financial-based asset investments and opened the markets up to a new audience. This audience is not based in small or exclusive financial centres, it is global, online and hands on. It can easily access information and is not prepared to pay high fees for something it can do itself.

When the first millennials logged onto mobile trading platforms and could be seen on trains, planes and the street buying Apple, shorting the Dow or switching to gold, the writing was on the wall. These investors now seek out free trading apps and want to manage their own portfolios.

The investment industry has reached a crossroads. A combination of technology innovation, market structure, higher barriers of entry and regulatory restrictions, has altered the way investment firms operate. The acquisition of clients, the management of risk and the ability to make money have all changed, but the most important factor is that the audience they are targeting has moved on.

If we look back to the 1990s, brokers had, depending upon the nature of the securities or product they offered, total control over access to liquidity, so they competed on the types of service from OTC through to exchange traded. It was a closed shop and very easy for good sales teams to make significant profits.

This was always going to change and the introduction of new rules and the appearance of new technologies opened up electronic trading. For the first time brokers had to start competing for clients. This first step in the democratization of trading created direct competition between the brokers and banks, based on levels of service and of course, pricing.

The move to social trading has provided brokerages with a new audience, based at home or accessing FX, CFD, stocks and commodities via mobile platforms. However, this model was open to abuse. Some brokers, just interested in volume, created a ‘churn and burn’ industry which fed off inexperienced traders. This was always going to lead to greater regulation and, very quickly, protection for retail clients was stepped up, but the access to trading and trading-based information continued to increase.

Technology has also meant that the range of products available from wealth managers and brokerages converged, but with a blurring of roles. Investors could access the same assets, through different channels with different payment models. Sales commissions/brokerage fees were slowly moving to a more inclusive percentage fee for assets under management, which brought some clarity.

Through this period brokerages continued to invest in technology, whereas asset and wealth managers looked to product development adding more and more ETFs to their offering. This continued to push down fees which led to further development of passive investment systems and robot advisers.

‘Do it yourself trading’ has arrived and opened the markets up to the disruptive access providers, the pay-as-you-go model. The number of free trade apps is growing very quickly and the old-school wealth and asset managers are realising that they no longer have the same access to clients. Their monopoly has gone.

For example, in the cash equity market, fees have dropped from double digit percentages to 1% and now to 0.05% and with free trade apps this will be pushed even lower. Trading is being paid for on the low-cost airline model. The price of entry is extremely low with firms making their money on the extras – the premium seating, more luggage and express check-in. The problem for traditional providers is that they still want to charge you for the privilege of investing with them. This will not work for the investors of the future.

The financial services industry also has to accept that outdated forms of advertising will not get through to this audience. Generation Z is used to being carefully selected and targeted. Linked in through friends, colleagues and referred by firms and organisations they trust. They know their data is being used and are scornful of companies who do not try and understand them.

As we move into this new market, brokerages do have one important advantage, they understand technology. They have learnt the importance of continual improvements and updates, and how to link this into social media channels. They are also adopters of cryptocurrencies and blockchain technology so are able to adapt.

As we plan for 2019 we know we have to concentrate on the investors of the future and provide them with the access to the products and services they want through the platforms they understand.

©BestExecution 2018

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