The world order on Wall Street is being tipped upside down

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Investment banks are having a tough time.

The rest of Wall Street: not so much.

That is the takeaway from a big report out from Boston Consulting Group on the capital markets and investment banking industry.

Investment banks are getting crushed. Their collective return on equity, an important mark of profitability, was 6% in 2015, according to BCG.

That is below the cost of equity, which is generally thought to be somewhere around 8% to 10%.

In other words, investment banks are destroying shareholder value, rather than creating it.

And yes, there are other businesses on Wall Street which are having a tough time right now. Hedge funds, for example.

But overall, the wider capital markets ecosystem, which includes the sell side (investment banks), buy side (investors) and market infrastructure players (exchanges, data providers), is doing great.

Here is BCG:

Even as regulation forces investment banks to retrench and hinders their ability to compete, other players remain unaffected and will even, in some cases, benefit. Over the next five years, revenues in the capital markets industry will grow by an estimated 12%, increasing to $661 billion from $593 billion in 2015.

Let’s run through that. First, asset management is going to become the dominant Wall Street business, replacing the investment banking business. From BCG:

The asset base of buy-side entities is expected to reach around $100 trillion by 2020, up from an estimated $74 trillion in assets under management (AuM) in 2014. If this transpires, the buy side will generate nearly $300 billion in fees by 2020, constituting 45% of the overall capital markets revenue pool (assuming favourable market conditions and current fee structures). However, investment banks, on the sell side, are expected to generate just over $205 billion by 2020, a decrease to 31% of the total revenue pool from 53% in 2006.

And then there are the information providers and exchanges. As more and more trading is done on electronic platforms, more and more data is created. That data has value. Here is BCG:

Information service providers and exchanges are poised to benefit. They will profit from increased demand for technology solutions and greater access to market information and analytics. Growth in electronic exchange trading and the use of central clearing will mean that their share of the capital markets revenue pool will grow to 19%, representing an estimated $125 billion, by 2020 — an impressive rise from 8% in 2006.

And here is a handy chart showing how the revenue mix is going to change.

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