Good times abound in the financial industry. Continued rising of financial markets is a tide that lifts all boats. We expect 2018 to be another strong year, but there are some areas within finance that should fare better than others.
On the Rise
While a contrarian pick, we believe trading may see a significant rebound in 2018. As we reported in our report on 2017 bonus levels, trading revenues have been down year over year due to a steady headwind of regulations, automation and low volatility.
But there are three reasons why we believe that traders will return to the ‘Masters of the Universe’ status they once held.
Likely Relaxed Restrictions
First, Trump is expecting to relax the restrictions that have handcuffed proprietary traders due to the Volcker Rule.1 Remember, this rule was conjured up in the wake of the financial crisis to prevent banks from excessive speculation.
The OCC (Office of Comptroller of Currency) has actually been rewriting the Volcker Rule since at least August.2
There exists a gray area between banks taking positions that facilitate client transactions (market making) versus directionally speculating with firm capital (prop trading).
With diminished trading activity by banks as a result of the rule, many fear the markets may become dangerously illiquid during the next market swoon.
A relaxation of the rule should allow much more trading activity by banks-for better or worse.
A Return to Volatility
Second, a return to volatility. Another reason the trading environment has been so bland is the lack of overall volatility. October was reported as the least volatile month in stock market history and 2017 is shaping up to be the least volatile year on record.
This is not an ideal environment for traders who prefer market swings. When volatility returns, traders can make money on both the long and short sides of the markets.
Bond markets have also experienced minuscule volatility as measured by the MOVE index, the bond market equivalent to the VIX. This is where the real action could take place in 2018, especially if hard-to-trade bonds need to find a market.
The passive investment movement has also hit junk bond ETFs and there’s no telling how that will turn out of rates rise quickly and there is a major selloff in the space. All this is good for trader’s P&L.
Finally, don’t forget that bitcoin futures recently started trading on the CBOE. There is no shortage of volatility in this market, with cavernous bid ask spreads in the futures markets.
Arbitragers are salivating with bitcoin prices trading at vastly different prices depending on which exchange (CBOE, Coinbase, Bitstamp, etc.) While it is still difficult to settle between exchanges, it shouldn’t be long before these professionals figure out a way to accomplish this.
While this is sure to narrow over time, derivative traders should enjoy healthy spreads for the foreseeable future.
With the stock markets at all-time highs and global market caps approaching $100 trillion it’s a good time to be a financial advisor. This is because as client’s portfolios increase, so do profits for wealth managers.
Today’s financial advisors earn the lion’s share of their income from the customer wrap fee, directly tied to assets under management. Advisors typically charge 1% of assets as a fee, on an annual basis. For larger accounts, they may discount that fee.
The wrap fee aligns the interests of the advisor and client and was brought about as an alternative pricing model to the commission-based model which promoted churning and overtrading.
For most retail accounts, even if the client has their investments in low cost passive ETFs, or even large cash positions (in the form of a money market account) the wrap fee will still apply.
Brokers also make money on referrals arrangements they may have with mutual funds and wholesalers. As long as there is not a market meltdown, the wealth management industry should see continued prosperity.
Areas Facing Headwinds
Europe’s ‘Markets in Financial Instruments Directive’ (MiFid II) regulation has the potential to be a major disruptor in many research departments. One part of the regulation calls for a separation of analyst research from trading commissions in the name of increased transparency.
Sell-side research remained in demand since it was bundled with the sales and trading products. The trend towards ‘unbundling’ research and making it a la carte (similar to what we’re seeing in the cable industry) changes the game.
Prices for access to sell-side research from institutional customers have plummeted and the fear is that it could result in less demand for analysts.
While it doesn’t officially go into effect until 2018, it has already led to a major collapse in the price of investment research by European banks.
According to a report by the Financial Times, the price of research that sell-side banks charge asset managers (mutual fund companies, exchange traded product issuers, etc.) has been slashed by at least 90%.3
The fear is that even though it’s only a Eurozone rule now, North American managers will be forced to follow suit and unbundle their research to compete for customers.
While MiFid II is a threat, it’s not a reason to completely panic if you’re an analyst or are aspiring to become one.
There will always be a need for investment analysts as the number of investment offerings continue to grow exponentially.
Alternative investments, Chinese IPOs, smart beta products, inverse ETFs, closed end funds and convertible securities are all examples of investments that need to be vetted for portfolio inclusion. And without analysts, asset managers would be facing a generation of unqualified portfolio managers, which is unlikely. There may also be increased opportunities for buy-side analysts.
Over the last few years, the passively-managed sector of asset management industry has been embroiled in a vicious price war. Today, passively managed products are almost no-cost.
Some products like SPY are offered commission-free and charge just a few basis points as an expense ratio. ‘Free’ is not good for any asset manager long-term.
Looking ahead, it would take continued upswing in financial markets (both for stocks and bonds) to offset the pricing power erosion. A weak stock market (or even a bear market) could really hamper their profitability. With the current bull market about to enter its 9th year, the odds of a correction are increasing.
If it does, active managers such as hedge funds, private equity funds and even managers who are dual-licensed to sell insurance products such as shield annuities (which have a minimum or floor on returns) are potential beneficiaries.
While their fees are also in a downtrend, actively managed funds still remain over a full percentage point in most areas.
Online Masters in Finance Degree
If you’re aspiring for a career in asset or wealth management, consider a Masters in Finance degree.
While similar to the broader, traditional MBA, a Masters in Finance is more focused on investment management. It can help you land a career in finance in just about any front office department where money management is being conducted.
This degree teaches basic financial principles such as the time value of money, internal rate of return, and the future value of an annuity. It also covers more advanced investment concepts such as dividend discount models, bond convexity, profitability ratios and derivatives pricing.
For added flexibility, look into an online Masters in Finance degree to avoid the opportunity cost of leaving work to go back to school.
Considering the excellent compensation and benefits, many financial positions have become extremely competitive. Earning a Master’s degree in Finance is a great way to distinguish you among other candidates. And if you’re switching careers or don’t have a degree or background in business, the credential is crucial for the transition.
Overall, 2018 is looking to be another great year for financial professionals. Make sure you have the tools necessary to join this fast-paced, well-paying career path.