Investment & Securities Industry Overview
The investment industry is comprised of a wide variety of sectors and service providers. At the top of the list are the giant asset managers, like BlackRock, a firm managing more than $4 trillion in investment assets, an amount so immense that it is roughly equal to the gross national products of Russia and India combined. Also at the top of the industry are the biggest exchanges, where billions of shares trade hands yearly, along with the major investment banks, those firms that raise money for corporate clients by selling their stocks and bonds to the public. Investment banks also deal in private equity investments and asset management, and they earn immense fees by brokering mergers and acquisitions.
Then there are the big firms that provide stock brokerage services. Some of them, like Merrill Lynch, are also investment banks. Others, like Charles Schwab, are primarily stock brokers that deal with millions of individual customers. However, the lines have blurred between sectors in recent years. It is common for one firm to operate in multiple segments of the business at once: commercial banking, investment banking, asset management, insurance, mortgages, financial advisory, venture capital, mergers and acquisitions and more.
2014 will be remembered as a banner year for the global investment industry, with 293 companies raising $96 billion in initial public offerings of stock (IPOs) on U.S. exchanges. Many of these firms, such as China’s Alibaba, were foreign-based. According to Dealogic, these were the highest numbers since the dotcom era’s 432 IPOs raising $105 billion in 2000.
Globally, nearly $250 was raised in IPOs on the world’s stock exchanges. Also during 2014, there were soaring amounts of stock sold in private placements along with massive amounts of bonds sold by firms and government agencies that were taking advantage of interest rates that remained astonishingly low.
Investment banks oversaw $3.4 trillion in mergers and acquisitions around the globe during 2014. While this was tremendous volume, it remained below the $4.3 trillion seen during the last boom in 2007, according to Dealogic. U.S. M&A activity in 2014 totaled $1.5 trillion, a 54% increase over the previous year.
The Global Investment Industry: This is a massive, global industry, and, in light of the fact that it provides the services that enable companies to have access to capital, it is one of the most important industries of all. Global mutual fund assets totaled $32.0 trillion on June 30, 2014, according to the Investment Company Institute, up from $27.4 trillion one year earlier. The World Federation of Exchanges estimated the total value (market capitalization) of stocks on all of the world’s significant exchanges at $64.2 trillion as of November 30, 2014 (up from $63.3 trillion one year earlier), with shares available in 44,346 companies.
After an extremely turbulent environment during the recent recession, the global investment industry has been greatly altered. Many of the best-known brands in the industry failed or were taken over. Lehman Brothers was allowed to fail completely. Bear Stearns was taken over by JPMorgan Chase at a nominal price. Global banking and investment industry leader RBS (Royal Bank of Scotland) was bailed out with public funds to the extent that it became controlled by the UK government. Insurance industry giant AIG was bailed out by the American government. The world became familiar with phrases like “toxic assets,” and American taxpayers, whether they liked it or not, backed emergency plans and market support programs with acronyms like TARP (Troubled Asset Relief Program) and TALF (Term Asset-Backed Loan Facility). By the end of 2009, the U.S. government had created initiatives based on corporate bailouts, asset purchases, emergency lending and financial market support totaling more than $2 trillion. These were only a few of the massive changes wrought by the upheaval of the global financial crisis that began quietly in the late summer of 2007 and roared into a full financial hurricane in 2008.
By the end of the painful 2008-09 period, the investment industry, on a global basis, had been through losses, layoffs, scandals, bankruptcies, forced mergers, government intervention, bailouts and/or disappointments on a scale not seen in decades. In 2010 through 2014, the investment industry began rebuilding and reshaping its strategy, and the industry generally enjoyed robust business, with strong volume and high stock market values. At the same time, governments, particularly in the EU and North America, began a relentless campaign of stricter regulation of virtually all facets of the industry.
Regulation: In the U.S. and Europe, one rapid result of the global financial crisis was a cry in the halls of government for greatly increased supervision and revamped regulation of the financial industry, from banking to insurance to the investment sector. New regulations are putting banks under pressure, making it more difficult to operate and harder to earn profits. The global committee known as the Basel Committee on Banking Supervision (BCBS) continues to monitor the health of the banking system and issue recommendations for minimum bank capital and risk management. The biggest changes faced by banks that plan to comply with the latest round of recommendations, the “Basel III” accords, will be in raising sufficient capital. The Tier-1 minimum capital requirement will increase to 8.5% by 2019 for many banks. These regulations also have a significant impact on the investment businesses operated by banks.
Tier-1 capital is a ratio of equity capital plus stated bank reserves to assets, and is a commonly used measure of a bank’s core financial stability. (The massive UK bank RBS had only about 3.5% of Tier-1 capital when the financial crisis began, and the bank promptly failed. U.S. banks endured losses equal to about 7% of assets during the recent crisis.) The intent is to make it much less likely that massive bank failures will be faced in the future, even during a major financial upheaval. Compliance with Basel accords is recommended to the governments and regulatory authorities where global banks are based, including the U.S. Nations may choose whether and to what extent to comply on a voluntary basis.
While this may be desirable from a stability point of view, it places burdensome constraints on banks. As a result, they will earn a lower profit ratio on assets. Also, in many cases, they are required to sell large amounts of new stock, thus diluting the positions of existing stockholders. (An alternative way to raise capital is to sell large amounts of assets, which many banks have been doing.)
In addition to the Basel accords, an international group known as the Financial Stability Board (FSB) makes recommendations to the world's governments as to regulation of financial services industries. In November 2014, the FSB issued new guidelines that would require massive injections of new capital (or the availability of vast amounts of cash on hand through the issuance of new bank debt) at many of the world’s 30 largest banks. The intent is to make sure that the banks have sufficient “loss-absorbing capacity” in the event that a major financial disruption occurs that would drive down the value of loans and assets held by the banks. A further goal is that the banks should be able to stand on their own, in case of a financial shock, without the need for government bailouts. America’s largest banks, such as Wells Fargo and Bank of America, could be required to raise tens of billions of dollars, depending on how the recommendations are interpreted and implemented by the U.S. Federal Reserve. Likewise, Europe’s largest banks would face stiff new capital requirements. Capital requirements would be significantly higher than those of Basel III rules.
In the U.S., a sweeping reform bill called the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by President Obama in July 2010, after European finance ministers approved similar regulations for much of Europe a few months earlier. In general, requirements under the law include broad powers for the government to monitor systemic financial risk and to intervene where it deems necessary. For example, it requires a bank to shrink in size if the government believes that the bank is posing financial risks, and an orderly liquidation process has been set out for extreme cases in which regulators need to seize and auction off financial firms that are nearing bankruptcy.
The Basel III rules are considered by many to be particularly hard on small banks. Combined with the Dodd-Frank Act, and a stringent new Market Risk Final Rule covering risk capital, Basel III and Financial Stability Board measures are part of a dramatic overhaul of the banking system. Another requirement of Dodd-Frank was the creation of the Consumer Financial Protection Bureau (CFPB) to oversee and regulate the issuance of things like mortgages, credit cards, personal loans and retirement plans. Its budget is funded by the Federal Reserve. The new agency has the authority to enforce its rules on banks with more than $10 million in assets.
The U.S. Investment Industry: Employment in firms that are involved in securities and investments was estimated at 886,700 as of October 2013 in America alone, up from 833,000 the previous year, according to numbers published by the U.S. Bureau of Labor Statistics. About 53.5 million Americans participate in 401(k) investment plans at their places of work as of 2015, according to Plunkett Research estimates, with assets totaling about $4.4 trillion as of mid-2014. Mutual funds in America held $15.9 trillion in assets as of November 2014, according to the Investment Company Institute. U.S. retirement and pension account assets totaled about $24 trillion in mid-2014.
Video Introduction to Investment & Securities Industry