Every important economic development sounded preposterous before it became reality. Thirty-dollar oil in 2016? Years of quantitative easing with hardly a whiff of inflation? An entire generation shunning TV?
It's obvious that breakthroughs defy conventional wisdom. "And yet we keep making the same mistake" when predicting the future, former Google CEO Eric Schmidt writes in his book How Google Works. It's hard to let go of conventional wisdom when anticipating breakthroughs, because conventional wisdom seems like a set of unbreakable laws.
Schmidt writes how companies can overcome this trap:
The question to ask isn't what will be true, but what could be true. Asking what will be true entails making a prediction, which is folly in a fast-moving world. Asking what could be true entails imagination: What thing that is unimaginable when abiding by conventional wisdom is in fact imaginable?
This is a great way to think about the financial industry, which is being upended at every corner at a faster pace than perhaps any time in history.
It's impossible to say what the industry will look like in 10-20 years. But I can imagine two big ways it could change.
Conventional wisdom: Individual investors are dumb-money amateurs.
What could be true in the future: New generations of experience mean most people start making better decisions.
Most people invest to fund retirement. But before 30 years ago, retirement meant a combination of Social Security, private pensions, moving in with your kids, and working until you died. The expectation that everyone needs to, and is responsible for, investing their own money is a young concept. The 401(k) didn't exist until 1978, and wasn't popular until the late 1980s. The Roth IRA is four years younger than Amazon.com.
The fact that mass-scale investing is young – no more than a generation old – could explain why individual investors routinely make such awful investing decisions. Unlike advice on how to get a job or raise a kid, investing has had little generational knowledge transfer, because older generations never invested on their own like today's workers do.
But that's changing. The baby boomers have invested for most of their lives and shown their kids exactly how to screw up. The optimist in me thinks those kids learned something and will make better investing decisions than their parents.
It's low probability, because investing is and always will be emotional. But I can imagine looking back at this age of bad investing decisions as an awkward transitionary stage between retirement schemes, rather than an innate feature of individual investors.
Conventional wisdom: Financial professionals make inordinate amounts of money.
What could be true in the future: It becomes just another professional job, like accounting or engineering.
Forbes tracks the top-25 highest-earning hedge fund managers each year. Average pay was $972 million in 2014. "The lowest earning hedge fund managers on our list made $280 million last year" it writes. For comparison, Baltimore's annual K-12 education budget is $1.3 billion. The guy who blew up AIG was paid almost $400 million, then retired on a $1 million-a-month consulting contract. I'd be shocked if an employed scientist has ever earned a tenth as much.
Those are extremes, but high pay is a feature throughout the industry. Median financial sector pay is $78,620 a year according to the Bureau of Labor Statistics, or 57% higher than the median wage in all industries for those with a bachelor's degree.
Warren Buffett once said of financial workers:
They work hard, they're bright, but they don't work that much harder or are that much brighter than somebody that is building a dam some place, or a whole lot of other jobs.
The reason financial professionals make a lot of money is complex, but probably centers on four points:
- Customer ignorance of fees.
- Regulatory advantages at large institutions.
- High barriers to entry protecting incumbents.
- Success of first-movers inflating the expectations of current customers.
All of these could erode. Some are already.
Vanguard alone is now significantly larger than the entire hedge fund industry. New trading rules mean Wall Street banks are laying off workers at a ferocious pace. The explosion of ETFs means fund fees now round to zero – Goldman Sachs just launched an actively managed fund that charges 0.09%.
Middlemen will always do well in an industry where trillions of dollars collide with dopamine and poor education. But the amount of new competition infiltrating the investing world is huge. In the past, financial products competed by promising the highest returns. Today, they compete by promising the lowest fees.
I can imagine world where a tiny few financial entrepreneurs make fortunes, great minds earn no more than doctors, and most of the industry either sees their wages revert to the nationwide average or have their jobs eliminated entirely.
Until then, business as usual.