Jerry Marlow, MBA
Freelance Financial Writer
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History is just one damn disintermediation after another |
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For decades, financial institutions have witnessed successive waves and different forms of disintermediation. Mutual funds and IRAs sucked savings out of banks. Commercial paper cut banks out of a lot of corporate borrowing. Electronic settlement left the DTC and a few specialized institutions with most of the securities clearing business. For many individual investors, index funds did away with the need for an asset manager. Now the Internet promises to link consumers and businesses more and more directly to the computers where financial assets and liabilities live and where transactions take place. Firms may not necessarily get disintermediated, but more and more traditional bank jobs are becoming superfluous. The Internet may prove to be the greatest disintermediator of all. Unless financial institutions can continue to keep it from happening— Schwab quotes research in which half the people surveyed said that talking to a broker about their investment options made them feel ignorant (Good work, guys!)—consumer financial education is likely to add another wave of disintermediation. When consumers learn that 25% of their life insurance premiums go for the salesman's commission, how many are going to buy life insurance from agents? When consumers learn that when they move money, nothing moves; how many are going to pay banks' stiff money-transfer fees? When investors catch on that the officemates of analysts who urge them to buy, buy, buy often are selling, selling, selling; who's going to bid up bubbles? When consumers figure out who's footing the bill for the wonderful ROE of credit cards, will they keeping footing it? When on-line investors start pulling market-equilibrium forecasts out of option prices and running Monte Carlo simulations on their home computers, who among them is going to have time for—much less listen to—that ancient, mind-numbing spiel about efficient frontiers? Barriers are falling. Competitors are calling—your customers. Technology keeps beckoning. The music is getting faster. The players keep changing. The dance gets harder. Who will win? Who will fall? What will be the biggest surprise of them all? |
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A time of change is a time of opportunity |
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While cycles of disintermediation may make the lives of financial professionals harrowing, the amount of money that consumers and businesses spend on financial services makes a lot of players want to compete. If people spend less than they make, spend more than they make, or spend everything they make, then they need financial services. Those criteria fit a lot of people—and a lot of businesses. What's more, almost all financial products—or their end results—are nothing but magnetic patterns in computer files—patterns that the Fed, SEC, or some other ecclesiastical power in some way has blessed. Financial products may be hard to sell. It may be tricky to build the systems to deliver them and store them. But, for the most part, nobody has to do any heavy lifting. (The only exception is international settlements. Then, in the basement of the New York Fed, someone has to pick up a few gold bricks in one country's closet and put them down in another country's closet.) If every consumer were rational, knowledgeable, and well informed; if the delivery of financial services were fully rationalized and automated; then every consumer would enjoy sophisticated asset-, liability-, risk-, and transaction-management services at low costs. But that is not to be—at least not yet! Banks and consumers still carry a lot of technological and psychological baggage from earlier eras. In getting financial services and consumers from where they are to where they could be, quick, nimble and savvy firms will be able to intercept old, high-price services with new, low-cost marketing techniques and delivery mechanisms. They will earn above average rates of return. Their stock prices are likely to go up. Who will they be? Other firms will get it wrong. They'll find themselves peddling and delivering services at high costs and low or negative margins. Their stock prices are likely to go down. Who will they be? This is where we come in. |
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Let truth be the prejudice |
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The lead service that financialfirmstocks.com offers you is research on the stocks of financial institutions—banks, brokerage firms, insurance companies, credit-card companies, on-line trading companies, and any other variations of these that may pop up. We are led by Adam Quelquechose whom Institutional Investor ranked eight times as the #1 financial institution analyst in the United States. Adam has a simple mantra for conducting and reporting research: Let truth be the prejudice. In the cosseted world of financial-institution investor relations, this mantra has earned him a reputation as a bomb thrower. In our research reports, we look not only at results but also at cause-and-effect relationships. We look at what firms have achieved and, as uncertainties resolve themselves, what they're poised to achieve. The future of financial services is rife with uncertainty. Management consultants oft speak of many opportunities for success being path dependent—the markets a firm can seize in the future depends on the firm's earlier decisions and cultivation of resources. Some firms may find themselves knowing where they want to go but unable to get there from where they are. The leaders of financial institutions today have to manage a mixture of change and opportunity in the midst of uncertainty. Nothing is certain. Nothing is easy. Yet no excuse is acceptable. We report to you not only how well companies are performing but also how well their managers are managing. We express our opinions about their competence, about the quality of their thinking, about the quality of resources at their command, and about the wisdom of the paths they're on. So, if you're an investor, categorize us as a bank-stock research source. We believe you will find our research honest, incisive and valuable. If you work in financial services, read on. We aspire to much more. |
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"The human mind passes from empirical diversity to conceptual simplicity to meaningful synthesis."
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Had Claude gone into financial services instead of anthropology, he would have loved it! We have plenty of empirical diversity to work with: Lots of different products, lots of different customer profiles, lots of different regulations, and lots of different technological possibilities. The trick for management is to select among this empirical diversity and organize it in a way that allows them to get to conceptual simplicity. With conceptual simplicity, you can segment markets, create products and build delivery systems. (Given the pace of change, nobody has time for meaningful synthesis. Lob that job to your ad agency.) Those blinding flashes that take us from empirical diversity to conceptual simplicity we commonly call ideas. Having your own is great! If you're running a little dry, you can get them from other sources—academics, management consultants, and—we hope—this website. We'll be putting our ideas on this site. We'll be ferreting out and reviewing the works of academics and management consultants. When we can, we'll include links to those works. Most importantly, we want to post your ideas on this site. If you work in financial services, you're the one trying to match customer diversity to technological diversity. Your brain is where the yearning for conceptual simplicity is producing blinding flashes. Send us a report. Share your thinking. Let us know how you think products and technology are best matched to customers. |
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"The true logic of this world is in the calculus of probabilities."
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For years, the home-stomping grounds of managing uncertainty was derivatives pricing. A lot of talent has migrated out of derivatives pricing and into building risk-management and capital-allocation models. The discounted cash flow techniques we all learned in our corporate finance courses look a lot like na¨ve younger brothers of derivatives-pricing models. We'll be reviewing management models and how financial institutions are using them. Does RAROC rock or does it take you down paths of no return? Does it manage uncertainty? Or does it leave you uncertain? Do these models work better than simpler approaches? We'll try to find out which models your peers think are of value and let you know. Tell us your opinion of risk-management and other models and we'll share your thoughts. |
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"Here we go!" vs. "Here we go again." |
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When your firm announces a new initiative, do employees narrow their focus and cheer? Or roll their eyes and groan? Lots of employees don't like changes in direction. They suffer an anachronistic need for a sense of completion. They want to keep doing jobs that they understand and know how to do. Successfully realigning employee thinking and organizational structures requires either charisma or some clever substitute. We're not going to go all touchy-feely on you, but we will be paying attention to whether CEO's are playing follow the leader with their employees or crack the whip. Which is your company doing? How well are they doing it and how could they do it better? Let us know. |
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"Language is but the instrument conveying to us things useful to be known."
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Oddly enough, hardly anyone pays attention to how and how well managers use language. Yet language is the tool that managers employ in greatest abundance. It is the symbolic tool they most often use to abstract and intervene in their economic, social and physical environments. Managers' use of language is our clearest window into the quality of their thinking. Perhaps it is because of a lack of rigorous scrutiny that we often hear management oratory that goes something like this: "In terms of our strategic vision, we are fully committed—at least in the near term—to delivering transparent world-class services on a daily basis that are second to none. "Are you comfortable with that?" Well, yeah. Everybody's comfortable—but nobody knows what to do. From time to time, we'll be shining, if not a spotlight, at least a flashlight on how lucidly managers express themselves. When, in your e-mail inbox and company documents, you find uses of language that exemplify your management's quality of thinking, send them to us. We'll see who speaks with dazzling clarity. We'll also see whose usage can get the deceased Milton to spin the most revolutions. |
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Everybody loves to make plans. Too bad somebody has to carry them out. |
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On most projects, the highest high comes when—after too many hours in the same room with the same people without enough sleep, air, food or water and with too many presentations by people who, for intellectual guidance, look to PowerPoint templates—everybody agrees that the plan is a great plan! All that's left is for some yet-to-be-identified mid-level manager who lacks imagination to carry it out. As outlandish as the thought may strike you, executing plans is hard work. Not only does the executioner run into the unknowns the planners foresaw, he or she runs into unknowns the planners—and their PowerPoint templates—didn't foresee—what aerospace engineers call unknown unknowns or unk-unks. What techniques do those mid-level managers who lack imagination use to implement plans successfully? How do they chunk projects down to sizes that can be executed before opportunity fades and management enthusiasm wanes? We don't know. We're analysts. But we'll be interviewing people who do know. We'll let you know how they do it. If you're one of them, share your secrets with us and we'll send you a CD we're sure you don't have. |
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"There is more logic in humor than in anything else because, you see, humor is truth."
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Very often, if ones insights get close enough to the real truth of a situation— especially a difficult situation— they are funny. They make people laugh. We value humor— not just because laughing feels good— but because humor often helps us get closer to the factors that determine important issues. Chances are, if you're sane and successful, you see the humor in the difficulties you face every day. If you've come up with some great quips, send them to us. We'll appreciate the humor and the insights. |
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We've asked you to send us your insights, your best thinking, and even your funniest lines. "What's in it for you?," you might ask. |
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Well, a few things, actually. Breaking Wave owns $450 million worth of stock in financial institutions. Actual ownership in some companies and potential ownership in others gives us access to many companies' top management. Where we have an ownership interest, we are liberal in discussing with management ideas that we think might improve their returns and raise their share prices. Corporations don't always work on the merit system. Sometimes people's best ideas get trapped and smothered out of sight of top management. Your best insights, ideas, and analysis may not be getting the reception, recognition, and execution they deserve. If that's the case and you send them to us, we may be able to help you get them around the bottlenecks. |
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"Do you know anyone who would make a great head of _______ for a major _______ ?" |
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For the customers of financial institutions, loyalty and convenience have become synonyms. For employees of these firms, loyalty is a more complex issue. Loyalty depends upon having ones thinking recognized, ideas implemented, and work rewarded. Loyalty is a two-way street. We take note of who the rising stars are in financial institutions. We note that companies do not always offer people of exceptional talent the recognition, opportunities for growth and rewards they could attain elsewhere. Headhunters call us every day. When we are aware of a gifted performer who might be a better fit with a different firm, we do what we can to make the market for talent more efficient. |
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The source of all insights, all analysis, all solutions, all humor is people |
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While some stick to their knitting, others seek larger roles in their professions— as visionaries and thought leaders. As we look through the thoughts and ideas that people send us, we'll be keeping an eye out for people who are especially adept at discerning trends, adapting to them, and capturing them. From time to time, we'll feature profiles of people whose observations and analysis we find most astute. We hope to see your profile on our website. |
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For a Word.doc version of this document that prints on legal-size paper, click here. |
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Jerry Marlow, MBA |