A New Financial Elite Emerges
For a long time, global banks dominated large parts of the economy. The coronacrisis put paid to that – very suddenly. A new species of a global financial elite has taken over in their stead.
Until three months ago, everything looked quite normal: after a terrific stock market year, global financial players were at the peak of their powers. At the forefront big U.S. firms such as J.P. Morgan, Bank of America, Citi or Goldman Sachs. Their profits and market cap exceeded those of European rivals several-fold and enabled them to pay top salaries to their top-people.
Their dominance helped them take a huge influence over the business of other firms; by advising on mergers and acquisitions, initial public offerings or complex loan structures. This all lent the global big banks a huge influence.
Profits Are Down by Half
The global coronacrisis, which has hit the U.S. hard, put paid to the seemingly insurmountable dominance in only three months. The profits of the banks have been cut by half. The reason: once highly profitable banks had to increase their provisions and write-offs for loans by more than average and their profitability will likely diminish in the coming months as an impending mega-recession hits most parts of the world. This has cut the influence of those banks strongly.
The decline of the big banks hasn't led to a vacuum though and the power of the global financial elite remains unbroken. New actors have joined the fray in place of the mega-banks: members of the trillionaire-club. In contrast to how banks traditionally have done their business, this new group of asset managers focuses on one segment only: investment management, or simply the management of huge amounts of money – trillions, assets they invest with all their know-how.
Massive Influence
The club includes companies such as Vanguard, Blackrock, State Street and Fidelity, companies that have trillions of dollars in assets under management. Blackrock alone has about $6 trillion. These firms may be pure players in investment management and refrain from offering any other banking services, but their influence is nonetheless huge.
The 30 biggest asset managers have about 60 percent of all assets invested in funds and other investment products – a total that amounts to some $100 trillion, according to a survey by Flowspring. This means that these firms have a huge influence on decision-making in the world of business.
Demands and Threats
This has become more apparent recently. Blackrock and State Street demanded from company bosses to reconsider their payment structures and to engage in a more sustainable company policy, in line with ESG criteria. If the bosses fail to heed this advice, the exit of large shareholders has to be countenanced and with that the loss of reputation and subsequent decline of stock market valuation.
The sustainability criteria that many investors have made an issue of sine qua non boosted the coffers of asset managers, not least following the outbreak of the pandemic. Low fees thanks to economies of scale and the insight that active investment managers won't beat an index over time are further reasons for the rise of asset managers.
Ever More in Ever Fewer Hands
And while they use their sheer power to cut commissions, margins are being squeezed and small players forced out of the market. Last year, Fidelity chose to cut they loyal clients' commissions gradually and over time and to stop taking any commissions for some funds.
The consequence is a consolidation of huge scale, with the takeover of Oppenheimer Funds by Invesco or the acquisition of Legg Mason by Franklin Templeton as the latest examples. The trend is clear: after a period of banking dominance, the time has come for the asset managers. The motto remains the same though: the concentration of ever more in ever fewer hands.
