The new millennium entered quietly, the Y2K crisis averted. The market was optimistic and pleased with the AOL and Time Warner merger, and NASDAQ hit an all-time high in 2000. But that was before the dot-com bubble burst. Ensuing years brought the record-setting bankruptcies of Enron and then WorldCom, and conviction of some of the executives. The Enron scandal also brought down accounting giant Arthur Andersen. The Dow Jones closed at a record high on October 9, 2007, but was soon followed by the bursting of the housing bubble, the demise of Lehman Brothers, and the Bernie Madoff scandal, among many others. In 2009 the Dow Jones marked the low of the recession closing at 6,547—off more than 50 percent from its high. While the market has recovered and in fact achieved new all-time highs, the twin wounds of the great recession and continued Wall Street scandals have left consumers feeling less than fulfilled.


At a recent industry meeting Chip Roame, managing partner of Tiburon Strategic Advisors, addressed the resulting consumer attitudinal and behavioral changes, including those driven by the widening wealth gap. “Consumer confidence and sentiment are both trending up but are extremely low,” he said. “A substantial trust gap has arisen, represented by the Harris Reputation Quotient that lists only tobacco and government lower than financial services. There is a major consumer self-serve movement due, in part, to the lack of trust in the financial services industry.”


According to Tiburon’s research there were 8.6 million millionaires in 2012 versus 9.2 million in 2007, so the size of the market for many financial services firms has not grown in the past six years. Yes, the stock market has hit new highs and the bond market has done relatively well, but consumers do not feel rich or happy because their homes and small businesses are still down in value from the peak. The numerous scandals affecting all segments of the financial services industry have contributed to consumer skepticism, and on a personal level most consumers have not achieved their financial objectives. What does the future hold?


It is difficult to overestimate demographic shifts and what they mean to the financial services industry. However, it is also important to look at two very different scenarios on how the industry may choose to address—or avoid—these trends.


As the demographic data in table 1 show, although population growth rates are slowing, the United States is changing in terms of age, diversity, and gender. Population trends also reinforce women’s longer life expectancies.
 

Industry Trends

These data illustrate several key trends with major implications for the financial services industry in these demographics.


Consumer Expectations vs. Industry Standards

In terms of their relationships with financial advisors, consumers are beginning to expect a fiduciary standard, even if they are not familiar with the terminology. More than 75 percent of investors expect all financial professionals offering fee-based advice to act in their clients’ best interest in all aspects of the financial relationship. The same percentage indicated they would not seek services from a broker if they knew the broker was not required to act in their best interest in all aspects of the financial relationship.1


General Wealth Trends

The wealth gap will become less pronounced with the emergence and growth of a new middle class of consumers. The mix in household wealth will change slightly as a higher percentage of consumers participate in the capital markets and as new forms of ownership emerge, such as more small businesses and shares of micro-cap businesses.

We expect major institutions such as stock exchanges, wirehouses, and banks (as underwriters) to have less relevancy in the years ahead in terms of the overall capital markets. There will be more regulatory flexibility toward raising capital, which will be accomplished with fewer intermediaries or layers. This in turn will lead to more direct holdings (now referred to as private equity for high-net-worth investors) making their way to Main Street investors.


Intergenerational Transfer of Wealth

As the baby boomers age, wealth will transfer to Generations X and Y. The oldest baby boomers turned 65 in 2011 and the youngest will reach 65 by 2029. How financial advisors work with multiple generations—in advance—will be critical. Rothstein Kass (2009) found that 86 percent of heirs in global family offices intended to fire their parents’ investment advisors once they inherited their wealth. It will take four new accounts to compensate for each account lost.2

The average financial advisor is older than 50, yet most do not have a succession plan in place. Additionally, only a small percentage of financial advisors are younger than 30. The number of financial advisors has been decreasing in recent years, and it is critical to make this field a compelling career choice for young people. It is also critical for mature advisors to realize the different dynamics of the next generation of advisors, who have a planning orientation as opposed to the product and sales orientation many current advisors started with.

Women as a Major Market

Contrary to some industry articles, women are not a niche market. Women currently control the majority of personal wealth (51.3 percent). These assets are estimated at $14 trillion and are expected to increase to $22 trillion by 2020 (InvestmentNews 2012). Women also are expected to inherit about 70 percent of the estimated $41 trillion in intergenerational wealth transfers by about 2050 (Havens and Schervish 2003). Additionally, women tend to live six to eight years longer than men and will need ongoing financial advice. However, about 70 percent of widows change financial advisors within a year of their husbands’ deaths. Women advisors make up only 30 percent of the industry3 and only 25 percent of CFP professionals (Kutler and Simon 2009).4


Diversity and Cultural Changes

Demographic data indicate that the U.S. population is becoming increasingly diverse racially, with the Hispanic population estimated to be about 23 percent of the total by 2030 and 30 percent by 2050. Younger generations are increasingly diverse. As of 2008, 58 percent of millennials considered themselves white or Caucasian and 42 percent were a minority.5 Social diversity is increasing as well, with a growing number of single heads of households as well as gay and lesbian couples who can benefit from financial advice. Same-sex couples need specialized financial planning to ensure they receive the same legal benefits that heterosexual couples receive automatically.


Additional Trends
According to Tiburon research, other trends also will impact the industry in the future:

Technology

The Internet will continue to fuel the technology revolution and online investor options will continue to grow in importance.

  • More than half of wealthy consumers believe that engagement with the Internet and digital technology contributed to their ability to create wealth and more than three-quarters believe that these will contribute to their success five years into the future.
     
  • Almost two-thirds of wealthy investors believe that collaborating with others online will be important to their continued wealth creation.
     
  • Offering innovative technological solutions will be an increasing need—and expense—in all segments of the financial services industry in the decades to come, to streamline efficiencies and to serve and retain clients.
     
  • Technology will continue to allow more consumers to design their own product offerings, lessening dependency on banks or large institutions. This à la carte approach allowing investors to select features in an annuity or subadvisors in a customized separate account will become the norm in product design.

     

Future Products

Product development will be influenced by consumers’ focus on increasing fiscal conservatism and deleveraging, and a growing population in retirement. Despite a prolonged low-interest-rate environment, and even with rising rates, consumer behavior will be altered for a generation in terms of how investors think about lower risk or cash-equivalency investing. This will result in the following:

  • Need for guaranteed return and income-generating products
  • Continued and accelerating innovation of fee-based accounts
  • Accelerating product shifts toward lower-total-cost investment vehicles, which will ultimately influence total cost of ownership, including for actively managed accounts
  • Growth of indexing and exchange-traded funds
  • Continued growth in popularity of unbundled products (separation of advice from product)

Other Trends

  • Demand for transparency on fees and charges
  • Full implementation of Dodd-Frank and/or other financial services reforms
  • Settlement in some form of the common fiduciary standard for delivery of retail advice
  • Higher percentage of participants in self-directed retirement plans and continued expansion of auto enrollment; likelihood of mandated participation in the United States by 2030
  • International markets and consumers will have an increasing impact on the U.S. and world economies
     

2030 Scenario #1

Continued growth in the wealth management business is driven by independent advisors, online tools and advice companies, and emerging international markets. The financial services industry has consolidated through mergers and acquisitions to enable economies of scale and allow success despite shrinking margins. Venture capital opportunities are plentiful. Focus intensifies on retirement income with accelerated growth in investable assets due to retirement account rollovers. The independent channel continues to grow and fee-based advisors increasingly dominate the market. However, the role of financial advice has evolved so that the value exchange is more transparent.

The industry has evolved, realizing what can be commoditized and what cannot. Recognizing that money is a means to an end, financial advisors now provide a more comprehensive spectrum of services that demand customization, including help with life-planning decisions. Trusted advisors become stewards of their clients’ goals as well as their wealth. Transparency is essential regarding fees and other charges, as well as explanations of risk/reward trade-offs. A fiduciary standard is the norm and consumers are more active participants in the planning and investment process. Financial advisors and the aided do-it-yourself channel reach collaborative leverage, ultimately benefitting the client.

The most-successful advisors have a well thought-out succession plan, implemented over a minimum of several years to allow for smooth transition with their intergenerational clients. Their successors are well-educated, and through association with other professionals are able to provide expertise in the areas of investments, insurance, tax planning, retirement strategies, and estate planning. They are likely to be part of a team of advisors where members develop areas of specialization, allowing the firm to demonstrate effectiveness in terms of the overall planning process. They have come out of one of the many financial planning certificate, undergraduate, masters, or PhD programs offered around the country and are viewed as professionals, many with specialties. They are technologically savvy and know how to interact with prospects and clients in multiple ways through social media, mobile direct communications, and in-person collaboration. Their business models and value propositions reflect their prospects’ and clients’ communication and technology preferences.

More women and minorities are entering the profession, thanks to company programs designed to provide mentoring, interactions with senior leadership, specialized training, and networking opportunities. These advisors are leading the way with financial education for clients and with interactive educational financial literacy games for upcoming generations. Women’s communications and relationship skills and ability to address business and personal needs fit the evolving life-planning model. Additionally, women are better at bridging the trust gap; very few women advisors have been involved in the numerous financial scandals of recent decades.

Insurance companies, asset management firms, investment companies, etc., are responding to demographic shifts and the digital revolution. They are retooling products to reflect more years in retirement, longer life spans, advances in medicine, changes in medical coverage, and the increasing long-term care needs of the growing 55+ demographic. They also are retooling distribution channels to better use technology and engage with the growing 35-and-under demographic. Self-service options become increasingly popular between now and 2030, but as in other areas of financial services, a combination of technology and face-to-face options provides the most-effective client experience. Companies work to determine which markets to serve and how to provide products and services that meet their needs, balancing costs and actuarial tables.

2030 Scenario #2

The industry continues to be perceived negatively by consumers because of continued financial services industry stumbles and the trust gap widens. As a result, investors move increasingly to a self-service model to the exclusion of advisors and major financial institutions. Without professional input and encouragement, fewer investors take action to develop and implement long-term plans; others make poor decisions. Either situation jeopardizes long-term financial security.

Advisors resist succession planning until there is little time left, when they make decisions that are not in the long-term best interests of their clients. Clients who realize that an advisor has no succession plan will begin to drift away rather than be set adrift at the advisor’s death. Those advisors who do not heed intergenerational and gender differences suffer huge outflows of clients and capital with the intergenerational transfer of wealth and increasing number of widows.

The industry maintains a status quo mentality and fails to develop programs to support the next generation of advisors and clients, including women and minorities. Advisors do not address increasing racial and cultural diversity, resulting in underserved markets and again driving investors to the self-service model.

Conclusions

With either scenario, the prolonged slow economic recovery coupled with prior financial services stumbles will result in a generation of more risk-averse consumers. Regulatory initiatives will continue, but are unlikely to be successful in legislation aimed at breaking up “too big to fail” institutions.

Demographic trends will produce continued focus on retirement income: accelerated growth in investable assets, insurance in force, and expansion of broadly defined wealth management services. The growth in these services likely will be driven by independent advisors, online tools and advice companies, and emerging international markets.

  • Leading fee-based financial advisors increasingly will dominate the market.
  • Retail banks will continue to lose power.
  • Wirehouses will embrace the fee-based channel and direct resources into acquisition and organic growth of registered investment advisors.
  • Direct distribution models are also likely to grow as consumers continue to embrace technology to help them meet their financial services needs.

Successful investment management firms will embrace international markets. China, India, and other areas in Asia are likely to become good markets for gathering assets in the coming decades. The emergence of a new consumer class in China will change the balance of economic power.

Some would suggest demographics alone should generate a multi-decade boom for financial services firms. At some level the demographic shift certainly will benefit the industry; to what extent this will occur depends largely on the decisions current and future leaders make. Where those strategic decisions are focused on innovation and the consumer, we believe the future can represent the best of times. Where those decisions focus more inwardly on the status quo and what is perceived to be solely best for the industry, we believe the future is uncertain at best. 
 

This article is reprinted from IMCA’s Investments & Wealth Monitor

Matt Lynch is a principal at Tiburon Strategic Advisors, where he has led numerous corporate strategy engagements for a wide range of financial services firms.