ETFs and passive investing are very likely to kill jobs, a new study has found.
Since the second world war, financial services has been the second most profitable industry after oil. At its peak, in 2007, finance, insurance and real estate (the "FIRE" sector) accounted for 40% of US corporate profits.
The super-profitability (and high pay) has meant that finance punches well above its weight in attracting talent from other fields. Engineers, lawyers and even former politicians often find themselves passing through the industry's revolving doors. And although scandals and crises come and go, the queue to work in financial services always remains.
But a wave of technological disruption, with ETFs and Vanguard on the crest, is threatening to change that.
According to a new report by consultancy Market Strategies, the majority of institutional investors with over US$500 million under management said they might dump one of their active managers within a year.
Due to a widespread feeling that asset managers overcharge and underperform, many institutional investors are considering jumping ship and picking up passive investing instead.
"Strong, consistent investment performance is a must-have in order to attract new institutional assets," explained Linda York, senior vice president at Market Strategies and author of the report.
"Active managers need to acknowledge the threat that passive management poses."
Among the likely benefactors of the shift to passive is Vanguard, the Pennsylvania-based not-for-profit, the report found.
"Vanguard benefits the most from this shift from active to passive management and is the manager most likely to be considered for future mandates by both pension and non-profit institutions," the report said.
Whether these institutional investors dump their active managers within the next year remains to be seen. But the trend to automation, and the threat to jobs, is already visible elsewhere in finance.
The NYSE trading floor, famous for its raucous blue coated traders is, nowadays, mostly automated. According to the Financial Times, there were more than 5,500 floor traders in 2000. Today, thanks to the rise of trading algorithms, there are fewer than 400, many of which work only part-time.
"Front office jobs" - investment bankers, salespeople and research analysts - have also been disappearing. According to a study from London-based research firm Coalition, more than 10,000 front office roles have been chopped at the 10 biggest banks since 2011.
And other pockets of the industry could well be next. Fintech startups are now taking on every corner of financial services. Legal and compliance, once thought impregnable, is now coming under attack from "regtech", which automates compliance functions. Financial planners are under the pump from robo-advisors, which put together ready-made investment portfolios using ETFs.
"Wall Street won't look like it had a mass exodus anytime soon. But job after job will be whittled away over time," said Thomas Davenport, a professor at MIT Sloan School of Management.
"Entry-level jobs will probably be the hardest hit; if you can teach a recent college grad to do a task, you can probably teach a machine to do it."
He worries that the disruption visited on the rustbelt Midwest, which ultimately led to the election of Trump, could soon be coming closer to New York.
