As the tone of political rhetoric surrounding the upcoming election escalates in hysteria, a pivotal issue for both parties is assigning blame for the decline of the middle class. Whichever candidate can make a convincing case that the other party is responsible for 52-year-old former managers driving delivery vans, college graduates stocking shelves at Trader Joes and 79-year old ladies greeting at Wal-Mart has a leg up on victory in November.
I hit on this theme in an earlier post on the decline of the middle class and it’s implications for financial advisors. It’s a powerful leitmotif that resonates because the post went viral. My argument then – and now – is that the financial crisis was the coup de grace on the middle class, and that financial advisors better go high net worth if they wanted to grow their business. Since then, there’s been even more evidence to support my thesis, including:
· Assessing the blame for the decline of the middle class is the part of an ongoing series of posts on The New York Times Economix Blog. This series is examining the major causes of income slowdown over the past decade and has noted that inflation-adjusted living standards have fallen by 6 percent since 2000, imperiling the assumption that living standards in the US will inevitably increase for the middle class.
· The Middle Classes’ Lost Decade is a report by the Pew Research Center that notes that between 2000-10 middle-tier median household income and median net worth fell, leaving members of the middle class saying that it is harder to maintain their lifestyle than it was 20 years ago.
But not everyone is enamored this argument. In fact, Dan Gross, a Newsweek/Daily Beast editor and columnist and author of Better, Stronger, Faster: The Myth of American Decline…And the Rise of a New Economy, doesn’t buy it at all. And he believes the fact that the middle class isn’t toast represents an opportunity for financial advisors.
“The case for the decline of the middle class rests on the notion that things were great in 2000-2006,” he says. “Markets went up, we had the housing boom, everyone felt like they had more wealth, but they were taking it out in home equity loans and using it to spend. My point is that all that stuff turned out to be fake – the additional retail sales turned out to be bad credit card debt, home appreciation wasn’t sustainable. It was a phony, unsustainable boom.”
In an economy that grows at a more modest, but sustainable pace, the middle class has been paying down debt and boosting their savings. In addition, many baby boomers who are in their prime earning years have savings and retirement accounts as well as assets that need to be invested for the benefit of their children’s college educations. That demographic represents a prime market for financial advisors, Gross believes.
“In the wake of the financial crisis, many have different attitudes towards risk and savings,” he says. “The value proposition between renting and owning isn’t nearly as clear as it was before. These are areas where financial advisors can add value.”
Many more affluent baby boomers, while comfortable investing in the U.S., aren’t as familiar with overseas markets, another area where financial advisor expertise can benefit investment portfolios. “There are a lot of opportunities overseas but a lot of potential danger spots as well as the traditional calculus of what’s safe and what isn’t safe has been turned upside down,” he adds. “When Italy and Spain are dangerous and Angola and Columbia are safe, that’s a real change. Financial advisors can help investors construct portfolios using ETFs and other investments to take advantage of the faster growth opportunities in emerging markets.”
In addition, many baby boomer DIY investors are realizing that as their net worth grows they could benefit from some unbiased financial advice. “There are a lot of people like me who have managed their own investments who now have kids who will be going to college who may be realizing, like me, that if they find the right advisor with the right fee structure, that it pays to have a professional overseeing your portfolio,” he says.
Advisors who can clearly articulate their value proposition to these mid-career professionals should be able to bring in a fair amount of business, Gross believes. “There’s a big difference managing a $50,000 portfolio as a do-it-yourself investor and managing a $500,000 portfolio,” he stresses.
I checked back in with Mike Casey, a Wall Street Journal editor and author of The Unfair Trade: How Our Broken Global Financial System Destroys the Middle Class who was the original inspiration for the toast post. Casey believes there is some hope for the middle class, especially if the U.S. can revive its manufacturing base and reign in the financial sector.
Still, even if the U.S. economy gets on a more healthy, sustainable track, it’s evident that the growth is overseas. As an Australian who has traveled extensively in China, Casey sees plenty of opportunity in China and emerging markets for large and mid-size financial services and financial advisory practices.
“It’s ironic that the same Wall Street that was at the heart of the global financial crisis also has the capacity to do finance well, and has a chance to capitalize on the huge opportunities available in China and outside the U.S.,” he says. “China has to liberalize the Yuan and open up its financial markets and when it does, the floodgates will open.”
It’s a market that needs both the basic financial services and financial safety nets that we take for granted such as workman’s comp, pensions and retirement funds as well as more sophisticated services for the rising middle class and high net worth individuals such as mutual funds, annuities and insurance. “These are sound financial products that Americans have been at the forefront of developing that will be needed by more and more people in China and developing nations,” he says.
Casey believes that the tens of thousands of Chinese and other emerging market teens and young adults who are being educated in college and grad school in the United States are a potential conduit for financial advisors seeking a toehold in Asian high net worth markets. “Anyone who has their kid educated here is likely to be more sophisticated about financial matters,” he says. “Those kids will also have an appetite for western financial products as they get jobs or open their own businesses and acquire their own wealth.”
There are a couple of take-aways here. The first is that even if the middle class is in trouble in general, there’s still plenty of opportunity for wealth managers who are strategic about the middle class niche that they aim to serve and who can clearly articulate their value proposition to busy, affluent, mid-career professionals. Secondly, developing some expertise and interest in emerging markets can serve two purposes: it can enhance your appeal for investors who are savvy enough to realize the growth potential from those markets and it can also position you to acquire Asian high net worth clients who are attracted to the professionalism and experience of U.S.-based advisors.