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The Massachusetts Financial Services Sector Talent and Technology – A 2024 Vision June 2015 Table of Contents • Executive Summary • State of Financial Services in Massachusetts • Trends Impacting Mass Finance • Talent in Massachusetts • Conclusion The Massachusetts Financial Services Portfolio Today • Financial Services is a cornerstone of the state’s economy and a critical component of the innovative system • State’s most important for-profit sector: Provides 4.8% of state employment, 9% of GSP • Above-average wages, solid middle class jobs • Average employee income of $115,810/yr, more than double the state average The Massachusetts Financial Services Portfolio Today Retirement Savings • Boston is home to of the top 10 retirement savings managers, making it the number one cluster of market leaders Mutual Funds • Home of the mutual fund, MA accounts for 18% of assets under management in the U.S Assets under management in the state grew 16.3% in 2013 Custody: The national leader • A national leader in custody and administration services with two of the nation’s largest operations, BNY Mellon and State Street, totaling approximately $55 trillion in assets under custody and administration Insurance: Top ten portfolio • One of two states to be home to top 10 insurers in each of the property & casualty, life, and health sectors The Massachusetts Financial Services Portfolio Today Hedge Funds: A Connecticut competitor • MA is home to of the top 50 hedge fund managers in the U.S.1 Venture Capital/Private Equity • • Education: Cultivating and Retaining Talent Of the $57.4 billion invested by the VC sector in 2014, 9.2% was invested in New England-based firms • Third to NY and CA in number of PE firms, third in aggregate capital raised over the last 10 years2 • Home to of the top 15 private equity firms in total funds raised over the last 10 years Private Equity funding is a top indicator of innovation and new technology in the region • Top graduate business schools: Harvard, M.I.T., Babson, Bentley, BC, BU, Brandeis, Northeastern, and UMASS • Over 50,000 international students come to Massachusetts to learn every year 1: Source: Absolute Return: Billion Dollar Club Top 100 2: Source: Thomson One The Future Vision Massachusetts as a Financial Technology Center Talent • Talent is short in high-demand areas such as FinTech, risk/regulatory and advanced analytics • International students are coming to Boston and Massachusetts more than ever to learn and live, but are too often returning home after graduation • Massachusetts is hindered due to negative perceptions on infrastructure and cost of living Technology • • • • Technology advancements have enabled enhanced customer experience and operational enhancements across the Financial Services sector The regulatory landscape is challenging the structure and economics of the industry Retirement savings is becoming more important as the world ages Alternative and passive investments are becoming more mainstream, and will represent 35% of assets under management by 2020.1 1: Source: PwC LLP, Asset Management 2020: A Brave New World, January 2014 The Future Vision Massachusetts as a Financial Technology Center Key Takeaways • Mass Finance is well positioned to take advantage of growth in the sector by developing new products to lead in asset management and insurance • There is an increased need for graduates and professionals with skills in new technologies • Massachusetts strengths in education give the region a unique advantage to develop and attract the top talent needed to grow • Massachusetts can fight negative perceptions by branding Boston as an attractive city for young professionals Table of Contents • Executive Summary • State of Financial Services in Massachusetts • Trends Impacting Mass Finance • Talent in Massachusetts • Conclusion Mass Finance is a For-Profit Employment Leader Mass Finance makes a leading contribution to Gross State Product Mass Finance supports more middle income jobs • The Finance and Insurance industry contributed to 9% of the total state output in 2013 This is the third highest contributing for-profit industry in the state behind Real Estate and Professional Services (of which a portion supports the Finance and insurance industry) • In 2013, the average salary for all occupations in the private sector and non-farm payrolls in Massachusetts was $49,910 Mass Finance employs approximately 167,000 in 2014 Massachusetts Finance Wages, 2014 • The average 2013 wage for Massachusetts employees in the Financial Activities industries was $115,810 Employed Percent of total MA employment Financial Services Median Income Finance & Insurance 166,800 4.8% Financial Analysts $84,220 Financial Managers $114,520 IT* 170,600 4.9% Personal Financial Advisors $95,760 Professional, Scientific, &Technical Services 288,600 8.3% Securities, Commodities, & Financial Services Sales Agents $117,610 Industry Source: Bureau of Labor Statistics, 2014 *Includes the following: Computer Systems Design and Related Services, Computer and Peripheral Equipment Manufacturing, Computer and Electronic Product Manufacturing; and Software Publishers NOTE: Total statewide employment as of December 2014 was 5,462,800 The Massachusetts Financial Services Portfolio In 2014, mutual fund assets in Massachusetts grew 4.2% and at the end of the year, Massachusetts accounted for 18% of the total U.S mutual fund assets under management In the US, Mutual funds saw significant net new flows in 2014 ($177.8 billion), the second-highest since 2008 14 of the hedge funds in Absolute Return’s Billion Dollar Club are located in Massachusetts and have more than $120 billion in assets under management 2014 Top 100 Hedge Funds AUM by Location ($US billions) 2014 Mutual Fund AUM ($US billions) Other 62.29 Rest of US 19% CA 70.84 CA 21% CA Maryland 5% CT 138.88 NY California IL 22.1 NY 18% MA 18% PA MA MA 98.4 Connecticut Illinois Massachusetts NY 466.25 New Jersey PA 19% Maryland NJ 14.6 Rest of US Source: Strategic Insight/Simfund, Dec 2013 Source: Absolute Return, September 2014 New York Other Summary of findings (2/3) IMPACT ON KEY OCCUPATIONS • In Banking, those occupations with advisory/ counseling profiles are expected to have significant replacement needs (>130,000 people in the US) driven by aging population in these roles and above average attrition rates There will also be an acute need to replace the current teller population (~250,000 people, representing almost 50% of current banking workforce) While there is a lot of attention on digitization trends and branch optimization which each call for specialized skills, the teller population with its astronomical 30% attrition rate, represents the most significant talent replacement challenge within banking Currently, the only training currently received by tellers appears to be on-the-job training (Exhibit & 8)1 • In Insurance, actuaries, computer system analysts and insurance sales agents will be the fastest growing occupations with 2.4%, 2.4% and 1.1% growth, respectively These three professions require highly specialized skills sets As for banking, replacement needs vary significantly by role Insurance sales agents represent significant replacement need (> 100,000 agents) as actuaries (>4,000) In both cases, the replacement need represents approximately one third of the respective workforces Finally, approximately 25% of the customer service representatives (>70,000) and claims adjusters/appraisers/examiners/investigators (>50,000) will need to be replaced in the next ten years (Exhibit & 8)1 • Across all occupations, insurance underwriters are the only occupation to present a decline over the next decade Replacement needs are still significant (>25,000, almost one-third of the current workforce) This is driven in part by the industry’s push to automated underwriting for personal lines insurance (auto, homeowners) and small commercial as a way to preserve shrinking margins in these lines of business (Exhibit & 8)1 • Across banking and insurance, major trends will shape the need for new skill sets For example, digital (internet, mobile, automation of manual processes) has permeated almost every part of the financial services value chain Starting with digital marketing at the front-end to automating claims and service processes on the back-end, technology plays a critical role in how the sector interacts with its customers Similarly, customers are more demanding – creating pressure to ramp up 24/7 access, build more customer service tiers to recognize and serve high-value customers, and better train customer service representatives Finally, the prevalence of big data is leading to the need for highly skilled data analysts and statisticians throughout the financial services industry (Exhibit 9) Figures based on US Massachusetts represents 2.7% of the US financial services workforce (and is expected to remain the same proportion until 2022) SOURCE: Moody’s Analytics, US Bureau of Labor Statistics; Team analysis Summary of findings (3/3) PERSPECTIVES ON INDUSTRY THOUGHT LEADERS Growing and shrinking occupations over the next decade • In banking, primary growth areas are technology, marketing, analytics, credit and risk specialists Conversely, manual roles will become increasingly automated • There is also a clear need for a blend of quantitative and leadership skills (employees that have the quant skill but are also able to elevate and extract insights that impact strategy and have people mobilize towards it) • In insurance, technology will play an increasingly important role as functions within personal and small commercial lines automate Undergoing initiatives to address the challenge • Some banks are setting up innovation incubators to test different technologies and distribution formats to address the talent challenge They are also experimenting with different training systems partnering with industry associations and local organizations to design and deliver industryspecific training • Many banks feel that they need to get first basics right by making sure that they have a strong value proposition and they are able to meet these expectations when people join • Banks currently find it difficult to place undergraduate majors with broad/unrelated degrees and no internship experience In general, they prefer to source talent from vocational schools because it minimizes onboarding time and friction Factors to capture talent & learnings from other states/ industries • Banking executives felt that a collaboration between educators, government and industry is required to keep the cost of education low, make it more accessible (e.g., online courses), and to make it available year-round • Some banks also felt that community colleges, often a good source of vocational talent, are under-funded and therefore resource constrained in terms of being able to partner with banks on talent development • Most agree that Boston and Massachusetts will need to improve their value proposition for young graduates (e.g cost of living, infrastructure,…) and offer help to companies that want to recruit locally” • Ability to create a “Boston hub” for third-party finance services leveraging current capabilities will be an area to explore Intersection of finance and technology: how to attract talent • Technology is a major growth area for banking, yet banks are struggling to source technology talent within the state • Inefficiency of Boston’s public transportation infrastructure and high cost of living are cited as major barriers to attracting top tech talent to the state Need for collaborative partnerships • Collaborative partnership between policymakers, educators and industry was cited as a key requisite to improving MA’s ability to retain and develop talent SOURCE: Interviews; Team analysis EXHIBIT Massachusetts has many sectors with high output and some employment specialization in Prof Services, Finance, and healthcare 2013 GDP1 $ Billions Real Estate Government Professional & Technical Services Manufacturing Healthcare Finance & Insurance Wholesale trade Information Retail trade Construction Educational services Administrative, Support, & Waste Accomodation & Food Holding Companies Other services Transportation & warehousing Utilities Arts & Entertainment Agriculture Mining, Oil, & Gas Total Total employment Thousands 42 440 274 250 562 164 123 86 348 122 170 168 281 64 124 76 10 52 13 67 52 51 45 42 39 23 21 19 15 13 12 12 11 446 Location quotient (LQ) 0.87 0.83 1.39 0.86 1.31 1.15 0.89 1.32 0.95 0.86 2.09 0.84 0.95 1.26 0.93 0.70 0.73 1.06 0.18 0.05 Finance and insurance is the 6th largest sector in terms of GDP ▪ Massachusetts has double the national level of industry specialization in education ▪ Professional Services has one of the greatest employment specialization in Massachusetts in sectors with more than $10B of GDP 3,371 LQ refers to location quotient: MA employment concentration vs U.S employment concentration for the year 2013 SOURCE: Moody’s Analytics, US Bureau of Labor Statistics ▪ Current asset sectors (>$10B GDP and LQ>1) EXHIBIT Massachusetts’ industry employment shows shifts over time and financial services has experienced a small increase over time BREAKDOWN OF MA EMPLOYMENT BY INDUSTRY Percent (bars); number in thousands (top) 2,857 Manufacturing 15 3,221 3,371 10 13 13 Government 14 Healthcare 11 10 8 5 5 11 Accomodation & Food Professional & Technical Services Finance & Insurance Wholesale trade Educational services Administrative, Support, & Waste Information 4 Construction Transportation & warehousing Holding Companies SOURCE: Moody’s Analytics, US Bureau of Labor Statistics 17 13 Retail trade Other1 14 2 2 7 1993 2003 2013 EXHIBIT Economic development depends on where you are in the work specialization matrix High Selective bets: High-growth sectors with a low concentration of labor Assets: High-growth sectors that with a high concentration of labor ▪ Choose specific high, growth sub- ▪ Grow businesses in these sectors sectors to grow specialization through attraction and creation of companies, and human capital strategies Growth in GDP Low growth, low specialty: Lowgrowth sectors with a low concentration of labor ▪ Support these sectors through a generally supportive business environment and their human capital strategies ▪ Leverage these assets by growing complimentary businesses in their cluster Legacy: Low-growth sectors with a high concentration of labor ▪ Maintain those sectors with low, steady growth in which Boston specializes ▪ Negative growth sectors should be reviewed for opportunities to repurpose human capital and assets Low Low High Location Quotient (LQ) EXHIBIT 4a Overview of performance outlook for Boston metro area sectors Projected GDP growth, 2013-2022 Percent Size of bubble = 2013 GDP Selective bets: High growth, low concentration of labor Assets: High growth, high concentration of labor Information Utilities Arts and entertainment Healthcare Education Transportation and warehousing US GDP Growth Rate Manufacturing Accommodation and food Admin., support and waste Real estate US financial industry GDP growth rate Professional services Government Wholesale trade Retail trade Construction Low growth, low concentration of labor Other services LQ refers to Location Quotient: Boston employment concentration vs US employment concentration 2-digit North American Industrial Classification System (NAICS) SOURCE: Moody’s Analytics, US Bureau of Labor Statistics; Team analysis Management Finance and insurance Low growth, high concentration of labor 2013 LQ EXHIBIT 4b Overview of performance outlook for Massachusetts sectors Projected GDP growth, 2013-2022 Percent Size of bubble = 2013 GDP 6.3 Selective bets: High growth, low concentration of labor 5.6 Assets: High growth, high concentration of labor Information 4.9 4.2 3.5 US GDP Growth Rate US financial industry GDP growth rate Education 2.8 Finance and insurance 2.1 1.4 0.7 Low growth, low concentration of labor Low growth, high concentration of labor 0 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2013 LQ LQ refers to Location Quotient: Boston employment concentration vs US employment concentration 2-digit North American Industrial Classification System (NAICS) SOURCE: Moody’s Analytics, US Bureau of Labor Statistics; Team analysis EXHIBIT Boston metro as compared to peers in Finance and Insurance Projected GDP growth, 2013-2022 Percent Size of bubble = 2013 GDP 2.1 US financial industry GDP growth rate 1.4 Charlotte Atlanta Houston Boston financial industry GDP Growth Rate 0.7 Los Angeles New York Chicago Boston Philadelphia San Francisco -0.7 -1.4 0.75 Miami 1.00 LQ refers to Location Quotient: Metro area employment concentration vs US employment concentration North American Industrial Classification System (NAICS) code 52, “Finance and insurance” SOURCE: Moody’s Analytics, US Bureau of Labor Statistics; Team analysis 1.25 1.50 2013 LQ EXHIBIT Financial services employment growth by sub-sector US Massachusetts Insurance (4 digit NAICS) No of employees 2012 (Ths.) Expected growth 2012-22 (%) ▪ Direct insurance (except life; health; and medical) carriers 602 0% ▪ Direct life; health; and medical insurance carriers 833 1.8% 74,302 N/A ▪ Reinsurance carriers 28 0.2% 146,027 N/A 966 2.2% 74,785 23 1.9% 96,272 ▪ Agencies; brokerages; and other insurance related activities Annual salary USD.2012 No of employees 2012 (Ths.) Expected growth 2012-22 (%) 78,212 Annual salary USD.2012 N/A 42 0.7% Banking (4 digit NAICS) ▪ Depository credit intermediation (banks – commercial banking, savings, institutions & credit unions) 1,707 1.1% 62,452 46 0.4% 86,620 ▪ Securities and commodity contracts intermediation and brokerage (investment banking, securities/commodity brokerage) 442 0.3% 219,252 14 (0.7)% 265,192 ▪ Other financial investment activities (e.g., portfolio management, investment advice) 423 3.7% 170,996 28 2.6% 206,834 SOURCE: Bureau of Labor Statistics; Team analysis EXHIBIT Financial services’ occupations growth in the U.S Employee growth indicators Key occupations Number of employees 2012 ▪ 345,900 ▪ ▪ Insurance ▪ ▪ ▪ ▪ ▪ ▪ ▪ Banking ▪ ▪ ▪ ▪ Insurance sales agents Customer service representatives 288,700 Claims adjusters, appraisers, examiners, and investigators 221,000 Secretaries and administrative assistants 101,100 Insurance underwriters Financial clerks Computer systems analysts Accountants and auditors Financial managers Actuaries Office and administrative support occupations Tellers Credit counselors and loan officers Sales and related occupations (includes advisory roles) 95,300 61,600 42,300 40,100 31,000 16,800 1,479,800 533,600 254,500 216,100 Projected increase/decrease in the number of employed persons in an occupation over the selected period Projected rate at which workers leaving the occupation need to be replaced over the selected period SOURCE: Bureau of Labor Statistics Occupational Outlook handbook 2013-2014; Team analysis Expected growth1 2012-22 (%) 1.1% 63,780 29.1% 100,816 0.8% 24.3% 0.5% 23.8% 0.7% 11.8% (0.7)% 27.4% 0.8% 19.3% 2.4% 12.7% 0.5% 26.7% 0.4% 17.0% 2.4% 27.6% 0.3% 22.6% 0.7% 46.7% 0% 18.9% 0.6% 32.3% Replacement needs (2012-22) Annual salary USD 2012 Rate of replacement2 2012-22 35,970 70,106 61,380 52,573 33,220 11,933 70,530 26,113 38,530 11,865 79,730 5,383 70,070 10,698 138,890 5,285 109,550 4,629 34,110 334,870 26,110 249,020 69,670 48,208 57,290 69,719 % # Replacement rate (2012-22, # of employees) EXHIBIT There are several trends which will significantly impact financial services labor market in the next decade Insurance Banking Growing talent gap in key A occupations due to aging workforce Payment disruptions opening the door to new players, C technologies, and innovations Insurers entering non-traditional insurance products (e.g., under B writing of risk products traditionally sold by banks) Branch optimization efforts calling for less transactionD based employee profiles E Increasing regulatory pressures and risk optimization needs F Drive-to-digital impacting delivery, marketing and service usage G Customer 3.0 raising the bar of engagement with them H Simplification in engagement model with customer by removing friction, steps, and inefficiencies SOURCE: Industry reports, Team analysis The new talent pool will require a: • Highly specialized skill set (e.g., actuaries, versatility/complexity of products) • • Strong technological background • Ability to deliver highly personalized and digital service to the customer (specially for those in customer-facing occupations) Exceptional feel for data and ways to analyze it to extract meaningful insights Table of Contents • Executive Summary • State of Financial Services in Massachusetts • Trends Impacting Mass Finance • Talent in Massachusetts • Conclusion Opportunities for Growth Due to the high concentration of asset management firms, Mass Finance is well positioned to take advantage of the projected growth in the sector Insurance companies stand to benefit from changing demographics and global trends, and the banking sector while smaller on a relative basis, is not as exposed to some of the broader dynamics as states like NY However, taking advantage of this market position requires collaboration among the leading financial firms and a collective investment in technology and talent Potential disruptors present unique challenges and lead to an increased need for capabilities with new technologies (e.g social media, data analytics) As a result, the demand for graduates with these skills will continue to rise The industry has a long history of supporting strong middle income jobs in the State and this is an opportunity to further support employment Opportunities for Growth The Universities in Massachusetts are among the best in the world and this provides Mass Finance with a unique opportunity to partner with academia on acquiring and developing top talent and keeping the next generation of Finance professionals in the State Barriers to keeping talent in the State such as high cost of living need to be managed The Mass Finance sector is unique in that it has a history of being the fiduciaries of assets and was not the focus of the 2007-2008 credit crisis The sector’s brand needs to reflect its history as it hopes to capitalize on the growth prospects over the next decade Prepared with Assistance from PwC and McKinsey PwC US helps organizations and individuals create the value they're looking for We're a member of the PwC network of firms, which has firms in 157 countries with more than 195,000 people We're committed to delivering quality in assurance, tax and advisory services CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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