Over the past 40 years, the financial sector over-expanded. Much of what is happening on Wall Street now reflects the process of reversing that excess capacity.
3. Increased pressure on fees and commissions.This trend predates ETFs and Wall Street shrinkage; highly paid people are being replaced with cheap software and online services. This is likely to continue for the foreseeable future.
This is a very good thing for investors: Academic studies have shown that fees are a drag on returns, and lowering these costs is a risk-free way to improve your returns.
4. Hedge fund troubles. This was not a stellar year for the hedge fund industry. First, there was the issue of underperformance, with the hedgies getting stomped — they underperformed markets by 15 percent. Although being beaten by the market is part of the business, it must be tough explaining to clients why an $8 ETF outperformed a service for which they were being charged 2 percent plus 20 percent of the profit. Then there were the legal troubles and insider-trading indictments. A few high-profile closings also hurt the industry's reputation.
What the industry has going for it is human nature (also known as "greed"). At the first sign of outperformance, the formerly skittish client base will come stampeding back.
5. Dispersal of financial news. As the finance industry gets smaller, the media that covers it is also shrinking. If investors are moving away from stock-picking, there is less of a need for the chattering classes to tell you all about it. That is reflected in a variety of ways: Cable television channel CNBC's ratings plummeted, and Dow Jones shuttered the 20-year-old magazine SmartMoney.
At the same time, alternative sources of news are rising. Blogs continue to be a source of intelligent analysis and commentary; Twitter has become the new tape/newswire. And start-ups such as StockTwits allow traders and investors to share ideas in real time. (Disclosure: I am an investor in StockTwits.)