This category covers establishments that participate in the investment advisement industry and are predominantly engaged in furnishing information and advice to companies and individuals concerning securities and commodities. These firms serve their clients on a contract or fee basis. Establishments that provide advice but also act as brokers or dealers are excluded from this category.
523920 (Portfolio Management)
523930 (Investment Advice)
A broad spectrum of advisory firms makes up the industry and is responsible for managing billions of dollars of U.S. and foreign assets every year. Mutual fund assets alone, of which investment counselors in the industry manage a significant portion, totaled more than $6 trillion. Mutual funds controlled more U.S. money than banking institutions.
The business of providing investment advice was deeply shaken in the aftermath of the terrorist attacks of September 11, 2001. Already dealing with a slow-down in the economy, investment firms reeled from the blow delivered to the U.S. economy by these events. The most apparent problem was the immediate decline of the American market. Stock prices plummeted, and investors quickly went from looking to make a profit to desperately trying to control losses. There was also an underlying problem of an overall decay of trust by investors in the dependability of the investments to provide positive results. A volatile market and poor return fueled mistrust and disillusionment among investors. A rash of accounting scandals, including Enron, also disheartened investors.
Futures and investment advisory firms, investment counseling services, research organizations, and mutual fund managers compose the investment advice industry. Several companies offer a multitude of services for all segments of the market, serving as "one-stop shops" for their clients' every need. Other organizations provide expertise in just one area, such as real estate investment research, indexing, or international hedging. Many of these firms form alliances with other specialty companies to deliver a package of client services. Although many firms exist solely to meet the market demand for these services, numerous industry participants offer advisory services only as a sideline. For instance, much of the advice and management of funds in the United States and abroad is provided by insurance companies and banks that are engaged primarily in other industries.
Futures and investment advisory firms typically provide advice and manage pools of funds for institutional clients. On a fee or contract basis, these firms seek to minimize their clients' exposure to risk in relation to the level of return that a client is seeking. Advisory firms that manage large pools of funds often seek the services of specialty firms that can provide expertise in a single area, such as real estate. In addition, many of these firms are often employed by larger players in the industry, such as mutual fund managers.
Investment counseling services may also assist institutions and provide services to larger firms. These firms, however, may also offer portfolio management services to individuals. Counselors will develop and manage an investment strategy that is specifically tailored to one individual's financial goals. Counselors consider the client's tax status, retirement plans, and other factors in an effort to protect and increase the client's resources. Though many firms require a minimum account size of at least seven figures, customers benefit from the individual attention. Money managers often charge between 1.5 and 3 percent of the account per year for their services.
Mutual Fund Managers. The largest single segment of the investment advice industry belongs to mutual fund managers. In mid-1999, there were 7,521 mutual funds. A mutual fund is effectively an investment company that pools the money of many individual investors. Investors buy shares in the fund and the company invests the shareholders' cash for them. The company hires an adviser, or management company, to develop an investment strategy and to manage the fund.
Mutual fund investors do not benefit from individualized service as they might from a personal counselor. Mutual funds, however, allow small investors access to professional investment advisers who would otherwise be inaccessible—and at a relatively low cost. Furthermore, a wide variety of funds exist that are tailored to the needs of specific types of investors, allowing people with smaller accounts to place their money in funds that match their financial needs.
Most fund advisers receive a fee for stock selection and portfolio management activities based on the average value of the assets under management. Depending on the type of services provided and the category of fund managed, fees typically range from .20 percent (for index funds) to more than 1 percent of average annual fund assets. The management fee is usually set on a declining scale relative to fund size. The management company may administer and pay for some or all of the following: office space and personnel; portfolio managers and traders; regulatory compliance activities; preparation and distribution of prospectuses, advertising, and shareholder documents and reports; bookkeeping, accounting, and tax services; and bonding and insurance.
As of 1999 the six largest investment managers by total assets directed 93 percent of the $6 trillion in assets. Banks and insurance companies managed a large portion of those assets, however. In fact, four bank and trust companies and one insurance company were included in this elite group. The typical U.S. pension plan had about 39 percent of its assets in U.S. stocks, 20 percent in bonds, 14 percent in the company's own stock, 9.5 percent in international stocks, and 7.2 percent in guaranteed investment contracts.
Individual segments of the investment advisory industry have varied histories. Most advisory services and financial markets in the United States were originally derived from European markets—particularly those in the United Kingdom. After their inception, however, U.S. financial markets were more heavily influenced by domestic market conditions and regulatory developments.
The roots of U.S. futures trading, for example, date back about 200 years, when supply and demand imbalances in regional cash markets and agricultural commodities arose. Following the creation of organized futures exchanges between 1850 and 1900, hedging with futures eventually became an integral component of portfolio management theory. Investment advisers and fund managers found that they could use futures, as well as other instruments such as options, as tools to reduce risk and increase overall portfolio returns for their clients.
Opportunities for firms that offered futures advisement services proliferated in the 1980s and early 1990s as growing numbers of individual speculators began putting trading decisions in the hands of professional money managers who specialized in futures. Between 1980 and 1992, the number of commodity futures pool operators registered with the Commodity Futures Trading Commission grew 28 percent, to 1,350. The amount of money under management by these pools increased during the same period from $675 million to about $20 billion.
Growth in Mutual Fund Management. In contrast to futures, the first American mutual fund was not organized until 1924, when Massachusetts Investors Trust was started. The stock market crash of 1929 and World War II both served to hamper development of this industry throughout the late 1940s, when fewer than 100 funds representing only about $2 million existed. Opportunities for investment advisers who managed mutual funds remained relatively meager throughout the 1970s, although several new types of funds were developed during the mid-1900s.
In the late 1970s and early 1980s the demand for mutual fund advisers, as well as for investment consultants who served these managers, began to escalate. A combination of economic and regulatory factors made mutual funds more appealing to both individuals and some institutional investors. Furthermore, the increase in the number of no-load funds, which did not charge an entrance fee, made mutual funds more attractive until the mid-1980s. As assets in the mutual fund industry soared during the 1980s for a variety of reasons, the demand for fund advisers swelled. Mutual fund assets under management skyrocketed between 1986 and 1996 from about $700 billion to about $3.5 trillion dollars by 1996 and to $6 trillion in 1999. Growth in individual retirement accounts helped swell mutual fund assets. By 1999, retirement accounts held one-third of mutual fund assets.
Increasing Fees. The fees that advisers were charging to investment companies also escalated in the 1980s. Contracts that had traditionally been set at a fee of about .5 percent of managed assets jumped to an average of between.75 percent and 1 percent for funds organized during the late 1970s and 1980s. Another implication of growth in the 1980s that managers of some of the more popular funds realized was a loss of investment flexibility. As managers of these funds saw their fees jump as assets inflated into the billions of dollars, they found that they could not achieve investment returns similar to what they had generated prior to the rapid growth of assets. As a result, some larger funds struggled to keep market share from smaller competitors.
Pressures to hold down investment management fees were growing and alternative pricing arrangements were gaining favor. Managers handling international equity assets were reaping higher fees for their work than their colleagues managing domestic assets. Also, the fees on domestic equity categories easily outdistanced the charges on domestic fixed-income securities.
Competition Increases. Despite the growth in the amount of assets under management by firms primarily engaged in the investment advisement industry, the share of the total money management market served by these companies fell in the early 1990s. Banks and insurance companies increased their advisory services in an effort to offset losses in their core businesses. In addition, large publicly traded brokerage firms, such as Salomon Brothers Inc., Merrill Lynch & Co., and Prudential Securities Inc., moved into money management as they diversified from transaction-based businesses into fee-based ones. Furthermore, regulatory developments supported this trend by reducing the traditional distinctions between financial institutions. The result was more homogenous, though increasingly competitive, financial markets.
Going into the late 1990s, the investment advice industry continued to experience both growth and turbulence in most market segments. Strong securities markets, shifting demographics, increased competition, changes in the structure of financial industries, and expanding global markets were all having a marked impact on industry activity.
Despite the recession of the late 1980s and early 1990s, futures and investment advisers, investment counselors, and mutual fund managers all enjoyed steady growth rates. Firms that managed mutual funds or provided expertise used by mutual fund managers realized the greatest gains. Aside from strong securities markets, fund advisers benefited from an infusion of capital into long-term funds, as money continued to flow out of banks and long-term insurance instruments into more flexible mutual funds that provided higher returns. The growth in defined contribution pension plans, such as the 401(k), imbued large amounts of cash into the funds. Particularly benefiting from growth in mutual fund assets were money management firms that capitalized on expertise in a specific asset class, such as mortgage-backed securities.
Another trend continuing into the twenty-first century was industry consolidation. To achieve greater economies of scale and to offer one-stop-shop services to larger institutional clients, investment management firms began acquiring or merging with their competitors in the late 1980s. The consolidation trend accelerated in the mid-1990s. In 1994 Mellon Bank paid the equivalent of $1.8 billion to the stockholders of mutual fund manager Dreyfus. Also, Swiss Bank announced the purchase of institutional asset manager Brinson Partners, whose principals would receive $750 million for payment in an 11-year earn-out. In 1995 the acquisition of Wells Fargo Nikko Investment Advisors by Barclays PLC created one of the largest institutional money managers in the world, with $205 billion in assets. By 1999, former giants Scudder, Dreyfus, Founders, Stein Roe, Invesco, and Mutual Series had all merged with banks and other financial institutions.
Growth continued during 1999, but slowly. There were 654 fund managers and only 52 new funds that year. Overall, sales fell 40 percent from 1998 to 1999. The slow growth rate continued to cause greater competition industry wide. Of the 654 fund managers, the top six companies controlled 93 percent of the industry.
Another notable trend was the rise of passive investing. During 1995 and 1996, the majority of active money managers failed to match the returns of the S&P 500 index. Accordingly, there was dramatic growth in the value of funds devoted to indexing, a strategy that sought only to match the market's returns (after fees) rather than outperform the averages. Index funds thwarted the existing fee structure because they charged less than half the fees of active managers.
In 1999 the index fund rose to prominence. This fund intended to match a market index such as the S&P 500. Competitive on price, index funds caused lower returns for their managers. At the end of 1999, Vanguard Group, Inc., led this sector, with sales double those of FMR Corp., known commonly as Fidelity Investments.
In the long term, the investment advisory industry was expected to realize slower growth than it enjoyed in the 1980s and early 1990s. Although aging baby boomers would be investing larger amounts of money in preparation for their retirement years, banks and insurers would continue to accrue greater shares of the money management market. Furthermore, costs associated with managing mutual funds were expected to increase at a faster rate than advisory fees, placing downward pressure on company profit margins. Unfavorable economic developments could also deliver an unforeseen blow to the industry.
After the initial shock of September 11 began to wear off, money managers waited for the investment environment to stabilize and customers to return. However, after a number of false hopes of recovery during 2002, investment firms continued to look for the inevitable upswing in the economy. Discussing the uncertain times, Joe Rob noted USA Today Magazine in January 2003: "Never before in my nearly 40-year career as a financial professional have I seen so many people so confused about so much. None of the old adages seems to apply anymore. Sacred troths have become suspect or simply irrelevant. No one feels this more keenly than those wondering how best to protect the assets they have managed to accrue, and how best to invest them for what seems an uncertain future." According to Rob, several time-worn investment assumptions have simply been tossed out the window, including a belief that blue chip stocks will dependably provide a 10- to 12-percent per year return over any given time frame and that the S&P will regularly bring 15 percent returns on average.
Despite growing misgivings concerning the existence of anything like a "sure thing," the economic instability along with the political uncertainty of the twenty-first century that included war with Iraq in 2003 caused many Americans to rethink their economic future. According to a study commissioned by the Consumer Federation of America and the Financial Planning Association, 92 percent of those surveyed considered financial planning important, and 53 percent reported that they had become more interested in financial planning since September 11, 2001.
The shift in the market led to several changes in how investment firms conduct business. Although financial planners were looking for new customers, they were no long courting small investors, as was popular during the previous 20 years. During the two-decade-long span of the bull market, public participation in investing broadened greatly, spurred in part by the ill-advised lure of frequent on-line trading. To garner more of the market, mutual fund advisers began offering products with no-load options, namely, no up-front fees. Individual investors responded by opening millions of accounts with very small initial sums. In 1980 less than 6 percent of American had money in mutual funds; by 2001, over 70 percent of American had invested in mutual funds.
The investment firms soon discovered that many of these tiny accounts sat idle and were too small to cover the cost of simply maintaining them. On average an account must have $3,000 to $4,000 to provide sufficient return to pay for the basic expenses of administering the account (i.e., basic accounting, statements, etc.). As a result, firms began significantly increasing the initial investment required to purchase their products. For example, Vanguard, known for its low-investment funds, scrapped it across-the-board $500 minimum investment. Now some of its most popular funds require a $25,000 investment with special discounted fees for $250,000 investments. Other investment firms announced that they would discontinue selling funds to the public altogether. As a result, funds must be purchased through a broker, who usually charges a 5 percent fee, and thus targets more-moneyed clientele.
Another current trend in the financial advice industry is for more businesses to vie for a share of the investment advice market. For example, State Farm, traditionally an insurance company, recently changed its motto to "We do more than just insurance," highlighting the company's move into the financial services field. At the same time, banks are also trying to become a one-stop shopping center for all their customers' financial needs, including investment advice.
FMR Corporation of Boston, Massachusetts, better known as the Fidelity Group, is the world's leading mutual fund company, serving approximately 18 million individual and institutional clients. Fidelity manages nearly 340 funds and has some $775 billion in assets under management. In 2002 the company reported a net profit of $808 million on revenues of $8.9 billion. The Vanguard Group, of Malvern, Pennsylvania, is the second investment firm in the United States, with more than $590 billion in assets under management. The company reported $1.57 billion in revenues in 2002.
Merrill Lynch is the long-time king of the retail/wholesale financial management sector. The company reported a net income of $2.6 billion on revenues of $18.6 billion in 2002. However, the company continued to struggle with bad publicity caused by allegations of biased research and possible involvement in the Enron accounting scandal. Goldman Sachs, another giant in the industry, posted a net income of $2.1 billion on revenues of $22.85 billion in 2002. Morgan Stanley posted a net income of $3.1 billion on revenues of $32.4 billion, and Salomon Smith Barney, a subsidiary of Citigroup, reported a net income of $1.8 billion on revenues of $21.3 billion in 2002. Charles Schwab, the world's largest discount broker with eight million clients and over 400 branch offices across the United States, reported a net income of $109 million on $4.1 billion in revenues in 2002.
According to the U.S. Department of Labor Bureau of Labor Statistics, there were 190,540 people employed by services allied with the exchange of securities in 2001. Of this total, 15 percent were management positions. Chief executives reported a mean annual income of $131,150; general and operational managers, $107,590; advertising and promotion managers, $115,080; financial managers, 108,010; and marketing managers, $98,920.
Business and financial operations occupations accounted for one-third of the industry's jobs. Personal financial managers reported a mean annual income of $73,250; financial analysts, $83,030; and accounts and auditors, $55,220. Sales-related occupations consist primarily of securities, commodities, and financial services sales agents, with a reported mean annual salary of $84,880. Thirty-four percent of the industry's jobs are office and administrative support occupations, with an overall mean annual salary of $35,140.
Job growth in the advisement industry was projected to be greater than the average for all U.S. industries throughout 2005. Much of the growth would occur in firms that were principally engaged in other industries, such as banks and insurance companies. Besides clerical and support positions, the industry employed large numbers of portfolio managers, financial analysts, and other investment professionals.
Other growth fields in the industry were expected to be in the areas of computer and information systems, which could experience over 80 percent growth between 1992 and 2005, and in sales. The greatest number of jobs would arise in larger metropolitan areas, particularly in Boston, Los Angeles, and New York.
According to the annual survey in Pensions & Investments , the top 50 international and global money managers grew by 27.4 percent in the year that ended March 31, 1996, to $357.3 billion. A year earlier, the top 50 managed a total of $280.48 billion and in 1994 the top 50 managed $240.14 billion.
As fund managers continue to increase foreign investment to achieve greater returns and to reduce risk, the demand for international investment expertise should accelerate at the start of the twenty-first century. The demand for services by foreign investors will also likely increase as other countries increase investment abroad and seek respected U.S. financial expertise.
Although sales of U.S. fund shares was negligible prior to 1993, interest by foreign investors in U.S. funds was growing as financial markets became more globalized. In fact, in 1993 the Securities and Exchange Commission was actively working to liberalize international fund sales and to create uniform global investment regulations that would eventually result in nearly seamless world financial markets. Although these events could increase competition from foreign firms, U.S. advisement firms were expected to benefit from integrated markets.
Technological innovation affected the investment advice industry in two notable ways in the mid-1990s. First, smaller firms formed alliances that allowed them to compete with larger one-stop shops. Second, global and domestic markets became more integrated and efficient.
Driving both industry developments were advanced information systems that allowed people to access and exchange information almost instantaneously. For instance, small specialty firms found that they could forge partnerships with other firms using information systems. While each member of the alliance retained their expertise, the groups were often able to deliver a comprehensive service package for a lower fee than that charged by many institutional advisers.
As information systems permeated every corner of the global marketplace, investment advisers benefited from instant access to global financial markets. Electronic trading and satellite information networks provided the information that was necessary for the industry to efficiently take advantage of global investment opportunities. Furthermore, new reporting and service delivery systems allowed advisement and management firms to reduce labor costs and errors and to maintain profit margins in the face of increased competition.
Competition was also expected to continue into the year 2000 from the wave of online investing. Unhappy with the industry's small growth, many people were beginning to manage their own money. Forecasters expected the trend to continue only in the short run, because the general public was not trained or knowledgeable about the industry.
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