The recent fine for malpractices at Wells Fargo, the west coast giant, has further dulled the glamour of a once vibrant US financial sector. As weary clients of battered banks begin to look elsewhere for inspiration, portfolio management techniques are likely to come under scrutiny, especially given that double-digit market returns have been confined to the history books.
The days of total US dominance in global commerce are on the wane, suggests Lori Heinel, deputy global chief investment officer at State Street, the Boston-based bank. It is unlikely that the US will ever regain behemoth status and must reluctantly learn to live in a new era of slow-and-low growth.
The almost palpable wind of nervous caution swirling around Midtown Manhattan backs the real economy trend. The swagger of the bulge-bracket bankers who once cooked up their products here has turned into something resembling a limp.
An admission from Peter Charrington, Citi’s head of private banking, that you can no longer “run everything from 53rd and Lexington in New York if you’re going to be a global bank” smacks of grim realism rather than welcome modesty.
Back in 2004, Thomas Friedman, the Pulitzer Prize winner and New York Times columnist, boasted the US was “the greatest engine of innovation that has ever existed”. He argued its achievements could not be duplicated by emerging markets, which lacked US freedom of thought, a risk-taking culture and advanced financial markets. But five years ago he wrote that the US was losing its supremacy.
The Big Apple’s banks have outsourced much of their digital development to Israel, China and India. The robotics and algorithms that until recently made the running in portfolio management, are no longer so prominent on home soil. On the surface, at least, foreign fields are sprouting better ideas and customer-centric models of operating.
While China has long been expecting a financial boom time, with foreign companies queueing up for quotas to manage assets, the mavericks of predictive intelligence, human-centred design and electronic interaction are today easier to spot in Singapore, Seoul and even Spain than Manhattan’s Fifth Avenue.
Relatively youthful Asian banks such as DBS have gone straight to mobile, avoiding legacy issues. Spanish survivors BBVA and La Caixa have been forced to digitise following a massive banking cull after a near-death experience for the Iberian economy. Yet their US counterparts have remained complacent, overburdened by structural complexity. Private wealth competes with consumer branches, investment banking and asset management for resources and recognition, meaning new ideas and practices can struggle to reach the street, believes April Rudin, the New Jersey-based wealth and workplace consultant. There are “antibodies” lurking within these organisations, she argues, stifling innovation and preserving a stolid status quo.
But the level of existing expertise permeating the New York giants should not be underestimated. And disdain for the product-pushing machines some US private banking and asset management providers have become is tempered by a grudging respect from some quarters. “JPMorgan has a training and talent pool second to none”, spreading its tentacles to wherever assets of pension funds and wealthy families are managed, says one prominent New York consultant.
For the US houses, global competition has been tamer than expected. Asian portfolio managers have offered a handful of megafunds, into which they churn clients without any real investment into product development, argues Amin Rajan, chief executive of Create Research, the asset management consultancy.
Europe has fared better for innovation, launching liability-driven investing and some social and environmentally responsible strategies. Historically, catalysts for growth — exchange traded funds, target-date funds, core-satellite structures and multi-asset investing — have come from the Americas. Until the Asian banks can create portfolio structures to match their technology, this is likely to remain the case.
“It is fashionable and all very well to talk about outsiders, disrupters and barbarians at the gate,” says Mr Rajan, “but the Chinese and Indian dogs have not yet barked.”
US hedge funds, for one, badly need a makeover in order for the investing public, fingers still scalded by toxic fallout from Bernard Madoff’s fabricated returns, to re-engage. New techniques in portfolio management must also be transferred from asset houses to the banks that oversee wealthy clients.
In light of this weak opposition, it is high time for the US to seize back lost ground, before the epicentre of portfolio innovation lurches decisively eastward.
Yuri Bender is editor-in-chief of Professional Wealth Management