According to a survey by the IBM Institute for Business Value, 90% of financial markets executives and government officials believe the returns of the past are over, primarily due to radical restructuring of the financial markets.
Firms will have to adapt to new, lower margins, executives said, and specialize around the services that clients value, rather than providing a full range of in-house offerings.
Executives also foresee massive consolidation in investment banking, asset management and wealth management. Enhanced regulation will require transparency and commoditize previously high-margin activities, respondents said.
Financial services firms that facilitate market making will focus on a specific area, be it asset management, trading or technology. At the same time, the number of investment advisors will decrease. Only small boutiques, such as private equity firms and hedge funds, will focus on generating high returns from high-risk investments.
The three trends toward specialization, client orientation and improved efficiency are triggering a restructuring wave on a greater scale than ever before, eroding margins and forcing all firms to reconsider their value propositions and their core business models, said Shanker Ramamurthy, global managing partner for banking and financial markets at IBM Global Business Services.
The new industry will not only lack some of the great brand names of the past, but will also lack many of its past characteristics from excessive risk taking, opacity and leverage, to massively high returns.
In the future, executives predicted, firms will continuously assess their risks and returns across each line of business and adjust their business mix accordingly. At the same time, these systems will also enable firms to refine client service through improved understanding of profitability by business line and product, as well as by individual client.
Executives also expect growth to remain sluggish through 2012. The survey was conducted among 2,754 participants, including 1,076 individual investors and 1,678 executives, to determine how financial markets should prepare for the future.