Tuesday, September 21, 2010

Essay on Financial Investment Industry Product Cycle

Essay on Financial Investment Industry Product Cycle

The investment industry is composed of a wide variety of firms. The main players include independent full line brokerage firms, investment bank subsidiaries of chartered banks, and discount brokers. Independent full line brokerage firms offer a wide range of services, including underwriting, trading of stocks, advice and research. The full service brokerage subsidiaries of chartered banks offer the same services; however, banks' brokerage firms may have a larger pre-established clientele. Finally, the discount brokers are basic stockbrokers that perform trades for clients who do not want investment advice. Banks entered the investment industry, whereby they took over full-service brokerages, introduced mutual funds to the banking industry and became part of discount brokering.

The demand for investment financial services was expanding. This became evident by the average increase in revenue, which was happening in the mid 1990’s. An additional indication of growth in the investment industry was the fact that the number of firms in the industry had increased from the beginning days of the investment industry. It is obvious that the industry was growing; however the cause for this growth was due to the demographics of society point towards an aging population. This aging society is comprised of active retired and semi-retired individuals who have knowledge, time and disposable income for investing purposes. Moreover, younger generations that fear the elimination of the existing of social security because of the aging population were interested in building there own retirement plan.


Secondly, the fact that people wanted to be more educated about the investments industry ties into an additional cause for growth in the industry during this era. The market was offering more information to those who wanted to be part of it. This additional information reduced investors' fear of not knowing enough, and if they choose to take advantage of the available information they could capitalize on it. Also, more information gives people the perception that they are able to make an increased number of higher quality investment decisions.

Finally, the entrance of banks into the industry increased public interest. First of all, banks carry a great deal of trust, which is extremely important to the average investor. Second, banks are higher profile marketers so they reach a larger number of people. In addition, the large number of branches makes the product readily available and easily accessible. Banks also have a large existing customer base to which they can market products, and influence investing. Overall, banks increased the demand for investment services by creating interest and awareness to people who would otherwise not give extensive consideration to investments.

The investment industry is very volatile in that the upward trend in the market does not guarantee the same trend tomorrow. Investment dealers cannot fully command the direction of their profits. The market they work with, capital markets is greatly affected by external factors. Falling stock and bond prices can negatively affect industry profits, because they reduce capital market activity (example of what happened after September 11, 2001 tragedy). In addition, volatility is affected by consumer confidence. If unsophisticated investors believe the market is unstable and fail to realize the problem may only be a rumor, then they may all pull out at the same time causing upheaval and drastic downturns in profit. In such a situation, investment dealers have no control over the situation or their profits.

Every investor suffers the consequences of volatility. However, even though this volatility exists there are means to attract investors to the capital market, thereby outperforming competitors and increasing revenue derived from service fees. First, the investment dealer must build trust with the investor. This is of extreme importance to the potential client because of the amount and importance of the funds that they are investing. More importantly, trust is needed in order to attract new clients, through word of mouth, and maintain existing ones.

Second, the client is greatly concerned with the performance or returns of their portfolio. Even though the market is volatile, the investment dealer is trusted to properly assess their clients' financial situation, level of risk aversion and investment decisions in order to establish the best portfolio. Their ability to carry out these functions will influence, to a certain degree, the performance of the investment dealer through returns.

Third, customers want continuous high quality service. This means that in addition to the service provided at the time of the portfolio selection, they also want a relationship with the dealer. Specifically, the customer may want to be kept informed on their portfolio as well as changes, which may be occurring in the market. Being able to continue this high quality service will prove to attract many unsophisticated investors and establish a long-term clientele. At this point, it is important to know that the investment dealers must have the expertise to identify which investors want this service and which don't. Their failure to do this may actually cause the loss of sophisticated investors who do not want to be bothered. One of the most important factors in choosing an investment firm is trustworthiness followed by their performance and service.

After these three factors, the speed of processing transactions has equal importance to a customer. Since prices change very rapidly in this volatile industry, timing is everything, For this reason, customers would prefer to have immediate accessibility to the trading floor without going through the middleman. Present changes indicate that the industry is headed in this direction. Presently many firms allows foreign securities to be traded through electronic trading terminals thereby bypassing the broker's responsibility to contact a trader on the costly exchange floor. The trade would no longer require attendance to the exchange floor, since the transaction could be done electronically at designated institutions. Investment brokers will now have to excel in areas, which cannot be replaced by electronic technology, such as research, knowledge about the industry and building a trusting rapport with customers.

The securities industry and the financial services industry in general are highly automated and technically advanced. This allows the industry to operate efficiently and cost effectively. The marginal costs of processing a $10 transaction and a $10-billion one are minimal. Technology gives investors the ability to make transactions easily and quickly. Therefore, investing becomes more attractive because of the relative ease and convenience of trade execution. The cost effectiveness of the industry also allows it to compete abroad with larger brokers thus increasing its customer base. The entrance of banks also boosted competition and led to further reductions in costs.

Chartered banks have also given the industry a boost because of their large client base, credibility, high-degree of technology, marketing expertise, and environment. Banks can offer an entire array of financial services and instruments, which provides a great deal of convenience. Customers can easily open direct trading accounts with their branch and make transfers to and from their savings accounts. This is the one-stop shopping approach has made the securities industry more attractive and strengthened it. Although law prohibits the transfer of financial information about bank clients between banks and their investment dealing subsidiaries (to maintain confidentiality and credibility), the banks can still act as channels of information to potential customers. The industry has a large number of indirect employees acting as agents for their services this helps to boost demand.

A growing interest in the industry in terms of education can only help strengthen the industry. Most industry brokers are required to pass Series 7, 8, 9, and 63 exams to trade. This translates to a high number of knowledgeable people being employed within the industry. This helps the industry in that customers are better served, and they are inclined to invest more due to the fact that they trust the investment dealer. Which allows for more cash flow into the market meaning more profits for the investment dealers due to increased commissions. The industry's dependence on the performance of the securities markets can be considered a weakness. This is because the industry's main purpose revolves around the stock market itself. So if the stock market is lagging (like it has the past couple years), profits will fall due to a lower number and value of transactions. In addition, firms are much less willing to enter a bearish market for new financing. This is also the case when firms are doing well since they may not require increased financing and may not need the services of an investment dealer. Unlike banks that have the government protecting the accounts of their customers, investors’ portfolios are in no way secured in terms of value. This creates a negative feeling towards investing because highly risk adverse individuals would rather lock up their money in the bank. The Brokerage Industry derives the majority of its income from commissions and since most of the revenue comes from commissions, it is apparent that revenue is largely dependent on volume and value of transactions. Transaction volume and values are dependent on the performance of the stock market and shifts in the stock market affect the stability of the industry's profits.

My conclusion based on the above life cycle; it is fair to say that the industry has a positive outlook for the future. This can be said despite the industry's dependence on stock market activity. A growing interest in the industry is proof of this, as the number of firms involved is increasing as well as the number of professionals entering the fields within the investment industry. An additional indication of the industry's growth is the increased participation of banks, combining one of most important industries with the investment industry. As the public becomes more aware of the potential gains from investing, the future of the industry will be reinforced.

Long gone are the days when people held large sums of money in static bank accounts. A changed population in terms of education, demographics are seeking an investment for their futures, which can earn greater returns than a bank account. Considering this new demand for securities, investment dealers have a greater incentive to devise additional attractive financial instruments in order to attract the undecided. In short, a need for greater returns leads to increased asset demand thereby increasing market activity which in turn will strengthen the investment dealer industry as a whole.

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