The Future of Investing: A 2020 Vision

What will the world of stocks, bonds, and funds look like in the next decade? BusinessWeek asked experts for their predictions

by Ricky McRoskey

In finance, things change. Forty years ago you couldn't buy a futures contract based on a currency, 25 years back the first collateralized debt obligation hadn't hit the market, and two years ago subprime wasn't a curse word on Wall Street.

But investors—and the folks who make money by packaging new investment products—always seem eager to move on to the next big thing. If financial history has taught us anything, it's that change is inevitable—change in everything from the way banks package risk, to the way governments regulate savings institutions, to the ways consumers can invest their savings. And with the recent upheavals in equity and fixed income markets, the financial industry is left to ponder: What change is next? What will the financial world look like in 2020?

The quick answer is an industry more transparent, more international, and more driven by individual investors than today's.

BusinessWeek asked financial professionals and academics their thoughts on what the financial landscape will look like in the year 2020. The experts foresee a world where investment banks will look more like government-backed depository institutions, mutual funds will be fewer, and stock exchanges will become international with super-governmental bodies regulating them. "A lot of the frameworks and walls built because of the old financial world we grew up in will come down," says Tanya Styblo Beder, chairman of the SBCC Group and a member of the board of directors at the International Association of Financial Engineers.

Disappearing Borders

One barrier that will fall is the distinction between foreign and domestic finance. Since 2000 developing nations have gone from producing 37% of the world's economic output to 45%, according to the International Monetary Fund, signifying a trend of greater parity between developed and undeveloped nations. With explosive growth in emerging markets and more companies with worldwide operations, a corporation's official "headquarters" will become less relevant, says Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School. "People think they're diversifying by investing in a country, and it leads to inadequate diversification," he says, "because the country of origin or incorporation is not the primary influence on the stock price."

More important for individual investors will be understanding where a company produces and sells its products, since an outfit based in France but selling products in Egypt doesn't truly represent the French economy. Siegel foresees the birth of the "international corporation"—a business globally diversified in where it produces and sells goods and not identified by its specific country. That, in turn, will necessitate a worldwide stock exchange, he says, and international accounting standards will become the norm. "We'll be thinking in terms of global markets all the time."

Yet the disparities today between regulatory bodies in emerging countries and developed ones will have to change, says Ravi Jagannathan, finance professor at Northwestern University's Kellogg School of Management. Many emerging economies haven't proven that their financial laws have teeth. So as wealthy people age in developed countries, they will want to invest their savings in countries with solid legal institutions that can enforce financial contracts. But "if you have young people in India, Africa, or Latin America borrowing from [the wealthy]," he asks, "how will the wealthy enforce those financial contracts?" Many of those emerging economies don't have the legal infrastructure to ward off corruption or reneged contracts, says Jagannathan. The answer will be a super-governmental international organization with executive powers, he says, which can oversee the flow of money across national borders. Think U.N. meets the Federal Reserve.

For the U.S. financial industry, one near-term possibility is that investment banks will start to raise funds via public deposits, says Charles Calomiris, finance professor at the Columbia School of Business. His reasoning: the Fed's willingness to salvage Bear Stearns and its decision to prop open the discount window in March signaled its increasingly hands-on relationship with investment banks. Banks like Goldman Sachs (GS) or Morgan Stanley (MS) do not raise funds through deposits but instead sell securities to private investors. That system traditionally avoided the "increased regulatory pressures" that deposit-taking commercial banks face, says Calomiris, but the system proved disastrous when the market for mortgage-backed securities dried up.