Future belongs to risk managers and those who understand seniors’ needs

(June 15, 2004) Advice and managed money are on the ascendancy in the financial services industry and, according to research guru Earl Bederman, this trend isn’t likely to change soon.

Bederman is president of Investor Economics, a Toronto-based firm that gathers market intelligence in the financial services industry. He presented an overview of the wealth market in Canada at the Canada Cup of Investment Management conference last week in Toronto.

Bederman told attendees that the next decade represents a brand-new environment for advisors. “The story of the 1990s was the changing composition of household balance sheets,” he said. “The asset mix was fundamentally different.”

In 1992, Bederman noted, equities made up just 13% of household financial assets. In 2002, that number was 35%. “The next decade is going to be about risk management.”

Bederman defines the wealth market as all financial assets that are owned by households for the purpose of accumulating wealth. It was a $1.7 trillion market in 2003. By 2015, Bederman predicts a $3.4 trillion market — a healthy 8% growth rate, but not robust enough to accommodate all of the financial advice providers in the marketplace, especially those who don’t figure out how to appeal to the older, affluent market.

The greatest demand, Bederman reported, will come from older wealth accumulators, those nearing 64 years of age, with their requirements for intergenerational wealth transfer strategies, risk management and after-tax returns. Fee-based services and those products best adapted to a fee-based model will prosper, according to Bederman.

“Individuals are risk averse but they want upside return,” Bederman continued. “Market-linked instruments and structured instruments are growing very quickly. Hedge funds fit very much into the risk averse view… [There’s also a] shift toward tradable funds. [Exchange-traded funds] fit nicely into the emerging fee-based world.”

In 2002, 46% of the financial wealth of Canadians was controlled by households that had more than $1 million (excluding real assets), noted Bederman. Unfortunately, this number only represents about 500,000 households. The good news is that the percentage of households with more than $1 million in financial assets will rise to 6.5% in 2012 from 3.6% in 2002.

Wondering where mutual funds fit into this picture? The researcher says funds will continue to grow, but far less rapidly than in the 1990s because the significant growth will be in managed assets — wrap programs, fee-based brokerage and discretionary services.

“The trend toward managed assets means there’s a shift away from product to solutions, a shift from manufacturing to distribution, from embedded economics to fee-based compensation. And it’s about the high end of the market,” Bederman stressed.

Wealth has been moving steadily to advice channels. In 1997, 46% of wealth was held by advice providers. In 2002, that was 55% and Bederman’s group expects advice givers to hold 63% of the wealth in 2012. The biggest beneficiaries of this trend will be, according to Bederman, full-service brokers, who will capture 30.5% of the advice pie by 2012.

R elated Story

Analyst makes case for market timing

Bederman added that the brokerage world is changing rapidly. “In the fee-based world, there is dramatic and rapid growth in proprietary, managed, discretionary solutions relative to investment funds,” he said. “In 1992, 84% of a broker’s fee-based assets were in stand-alone investment funds. In 2003, [funds accounted for] only 64%. Much of that difference went to fee-based brokerage.”

Another noteworthy trend Bederman highlighted is the shift in relative size from pension assets to retail assets. Institutional assets used to dominate the marketplace but retail assets have now surpassed them. “The retailization of the managed money business is a well-established trend and is going to continue, but in our view it will accelerate toward private client and individual assets.”

If Bederman’s extensive data is correct, advice, risk management, solutions and fees will be the focus of the next 10 years.

• • •

Donna Green, MA, CFP, is a personal finance writer and assistant author of The New Investment Frontier: A Guide to Exchange Traded Funds for Canadians, and Surprise! You’re Wealthy: A Woman’s Guide to Protecting Her Wealth.

• • •

(06/15/04)