Money Rolls In for the Money Managers

First, we begin with the bailouts. Had central bankers and politicians let capitalism run its natural course, the financial landscape would very likely look very different from today. I imagine there would be more competition, less concentration of financial power and fewer gigantic money-center banks. The results of what would have been an epic Darwinian struggle during and after the financial crisis are hard to imagine in great detail. Almost $1 trillion in cheap loans to bail out the banks instead of letting them collapse into bankruptcy isn’t how Adam Smith envisioned the workings of the marketplace.

Next, we move to, well, more free money. Central banks around the world have set the cost of funding at close to zero. The mechanisms that central banks use flow directly to the world’s corporations. Companies can readily access credit in order to buy back shares, issue dividends or (heaven forbid!) do some capital investment and hiring. It should come as no surprise that the actions of Federal Reserve, the European Central Bank and the Bank of Japan haven’t exactly worked to the detriment of financial centers such as New York, London and Hong Kong.

Third — and don’t underestimate the significance of this — corporate profits have dramatically recovered. They have more than doubled from the lows of the financial crisis. This has had a huge impact on stock prices in several ways. It made the aforementioned share buybacks much more feasible.

As Bloomberg News reported yesterday, Standard & Poor’s 500 Index companies are “poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings.” That is an astonishing data point. Estimates vary, but increased dividends and share repurchases are credited with being responsible for anywhere from 30 percent to 60 percent of stock-price gains.

Finally, I would be remiss if I failed to mention various trends in asset management fees.

A variety of robo-advisers have driven costs way down. 

Wealthfront, Betterment and Liftoff  (my humble offering in this space) charge a fraction of traditional wealth-management firms. Although these services have garnered lots of headlines, they manage a paltry $3 billion in assets. Meanwhile, hedge funds are now overseeing $3 trillion and charging the proverbial 2 & 20. Private equity and venture capital are also charging fees that include 2 percent of the annual assets under management and 20 percent of any gains.

Fees may be going down at the low end of the spectrum, but they remain surprisingly strong at the high end.

If you imagined the financial crisis was going to cut the financial industry down to size, you haven’t been paying close attention.