As seen in Boston Business Journal

The financial services industry has evolved, presenting potential investors with additional investment opportunities through fund structuring and investment objectives. Recently, significant change has been brought on by an increased need to address environmental, social and governance (ESG) concerns, expansion of fintech, and widespread labor shortages due to the great resignation. These disruptors have increased the amount and type of change to the evolution of the financial services industry.

Environmental, social and governance

Investors’ increased desire for products that address growing ESG concerns continues to disrupt the financial services industry. This has also provided opportunities to create specific fund offerings that provide broad ESG investing opportunities or to focus on a subset of ESG. Along with additional revenue for advisers, this has created incremental compliance monitoring requirements and questions around determining whether an investment is in compliance with an ESG fund’s purview.

Additionally, certain private equity firms market themselves as ESG-focused across the brand, including by trying to increase their own metrics and the metrics across their portfolio companies, to attract additional investments throughout their portfolio companies, in an effort to attract additional investments throughout their portfolio rather than have a specific ESG focused offering.

Fintech

Financial technology (fintech) continues to evolve and reshape the financial services sector in several ways, such as increasing access to financial services and additional technologies for recordkeeping, storing and transacting. Fintech has created opportunities for a broader range of consumers to access additional innovative services that are more affordable and accessible, such as robo-advisers that provide algorithm-based investment advice. This has made it easier for investors to gain money management services without relying on traditional financial advisers.

Digital payments allow users to transfer money more efficiently to friends and family, pay bills and make purchases online. Peer-to-peer lending services have provided more efficient opportunities for individuals to invest in peer-to-peer loans – from an investor’s perspective, and a path to easier and quicker access to capital, compared with some traditional lending practices – from a borrower’s perspective.

The development and further enhancement of blockchain technology and cryptocurrencies is another significant shift generated by fintech. Blockchain has changed how many organizations and individuals store, transfer and exchange data. Blockchain assigns value and has the potential to transform the financial services industry, with better understanding and acceptance of the technology and crypto assets likely to occur over time.

The great resignation

The great resignation commenced in 2021 and remains in 2023. Many employees are leaving their jobs for better opportunities or to pursue an improved work-life balance. The great resignation significantly impacts every industry, including financial services. As a result, there has been an increasing skills gap throughout the sector. The gap is driving companies to increase compensation, change their culture to better attract and retain talent, and increase digital offerings for employees and clients so they can meet market demands for more real-time information and employees’ ability to work remotely.

Private equity companies are facing these challenges on multiple levels as they contend with ensuring they have the appropriate resources internally. These companies are also struggling to fill roles at their portfolio companies, which are needed to ensure smooth operations and accurate reporting to the private equity firms, ultimately resulting in growth at the portfolio companies and for their investors.

Citrin Cooperman's Financial Services Industry Practice is committed to providing current industry insights on the trends affecting the sector. Our dedicated professionals can assist with guiding you through these market disruptors as well as other challenges specific to your business. To learn more, reach out to Jacob Rose at jrose@citrincooperman.com.