Investment & Wealth Management Industry Analysis

Industry Overview and Economic Environment

This paper conducts an industry analysis of the investment and wealth management sector by examining the political, economic, socio-cultural, technological, and legal environments, and then applies those findings to a personal career positioning statement.

Most economies around the world have taken a severe hit from the COVID-19 pandemic. While it is still too early to determine the pandemic's long-term economic impact, there is a high likelihood of a major downturn in economic activity. Large numbers of people have lost jobs since February — Ettlinger and Hensley (2020) note that "state and local governments combined have lost 1.3 million jobs since February." In such a scenario, people will have less disposable income, effectively meaning they will invest less, and businesses (many of them listed on various stock exchanges) will see decreased profitability. The investment and wealth management industry is unlikely to emerge unscathed. As Whyte (2020) points out, industry assets have fallen "to $102.7 trillion from $104.4 trillion in 2019 — ending more than a decade of growth for money managers."

Political, Legal, and Regulatory Environment

The investment and wealth management industry is one of the most heavily regulated industries in the United States and around the world. This is especially true given the need to secure investor interests following past instances of fraud. According to Deloitte (2020), most laws and regulations introduced in recent years have largely been aimed at protecting both consumers and markets. With respect to markets specifically, "regulators, both domestic and foreign, are focused on data privacy protections to mitigate the risks that result from improper collection, handling, storage, and use of data" owing to increased utilization of advanced technology (Deloitte, 2020). As a consequence, those operating in this space are likely to face an increasingly restricted environment.

The immediate future also looks uncertain given that this paper was written during a period of political transition. At the time of writing, it was still unclear how that transition would unfold given the incumbent president's refusal to concede defeat. Such political standoffs can be detrimental to financial markets in both the short run and the long term.

Technology and Competitive Landscape

If there is one industry that has been profoundly affected by technology, it is investment and wealth management. This is especially evident in the rise of algorithmic trading (Epstein, 2013). In hedge fund management in particular, there appears to be an ongoing race with respect to algorithmic trading — the utilization of sophisticated computer programs to execute trading orders at a frequency and speed no human trader could replicate. As a consequence, the demand for human traders is likely to decrease. Technology has also given rise to wealth management applications that largely mimic the functions of portfolio managers. Examples include ARQ, Personal Capital, and Wealthsimple. These developments will likely further reduce the need for human professionals in this field.

The investment and wealth management industry is also one of the most competitive in the world. Only those companies able to post consistently high returns survive in the long term. Firms largely distinguish themselves through their investment approach, with the primary distinction being between long-term and short-term investment strategies. In the long-term category, Berkshire Hathaway — run by legendary investor Warren Buffett as chairman and Charlie Munger as vice-chairman — stands as a prominent example. In the short-term category, dominated largely by hedge funds, Renaissance Technologies run by Jim Simons is a leading firm.