Execs Predict 'New World Order' For Financial Services
According to a survey by the IBM Institute for Business Value, 90% of financial markets executives and government officials believe the returns of the past are over, primarily due to radical restructuring of the financial markets.
Firms will have to adapt to new, lower margins, executives said, and specialize around the services that clients value, rather than providing a full range of in-house offerings.
Executives also foresee massive consolidation in investment banking, asset management and wealth management. Enhanced regulation will require transparency and commoditize previously high-margin activities, respondents said.
Financial services firms that facilitate market making will focus on a specific area, be it asset management, trading or technology. At the same time, the number of investment advisors will decrease. Only small boutiques, such as private equity firms and hedge funds, will focus on generating high returns from high-risk investments.
"The three trends-toward specialization, client orientation and improved efficiency -are triggering a restructuring wave on a greater scale than ever before, eroding margins and forcing all firms to reconsider their value propositions and their core business models," said Shanker Ramamurthy, global managing partner for banking and financial markets at IBM Global Business Services.
"The new industry will not only lack some of the great brand names of the past, but will also lack many of its past characteristics-from excessive risk taking, opacity and leverage, to massively high returns."
In the future, executives predicted, firms will continuously assess their risks and returns across each line of business and adjust their business mix accordingly. At the same time, these systems will also enable firms to refine client service through improved understanding of profitability by business line and product, as well as by individual client.
Executives also expect growth to remain sluggish through 2012. The survey was conducted among 2,754 participants, including 1,076 individual investors and 1,678 executives, to determine how financial markets should prepare for the future.
Advisers Less Confident in Retirement Income Skills
Thirty-six percent of financial advisers are less confident than they were a year ago in their ability to manage reitrees' assets-with most blaming the complexity of retirement income portfolios needing to both generate growth while guaranteeing income, GDC Research and Practical Perspectives found through a survey.
Seventy-seven percent have changed how they allocate assets in response to the market environment, and 14% have changed the way they build retirement income portfolios.
Respondents said that building retirement income portfolios is more complex, time consuming and must be customized, and will only become increasingly more challenging.
"While virtually all advisers agree that retirement portfolios must support dual goals of providing consistent income and long-term asset growth, there is little agreement on the best method to achieve these objectives," said Dennis Gallant, president of GDC Research and co-author of the report produced with Practical Perspectives, "Examining Best Practices in Constructing Retirement Income Portfolios."
Advisers feel tremendously responsible for their clients being able to "meet basic living expenses, such as shelter, food, energy and healthcare, [and this] has never been more of a challenge for advisers," said Howard Schneider, president of Practical Perspectives.
Advisers are split on whether to take a risk-adjusted total return approach to clients' portfolios (54%) or divide investments into various pools (46%). Most said they would like asset management firms to help them with the overall retirement income process rather than create additional solutions, which they are currently satisfied with.
A majority of advisers said they were not interested in the newer retirement income solutions and preferred familiar investment vehicles and trusted providers. Nonetheless, the advisers relied on a wide array of mutual fund and insurance companies, with only one firm, American Funds, used by at least 20% of the advisers surveyed.
401(k)s Under Heavy Fire
CBS' "Sixty Minutes" segment on 401(k)s, which slammed them as being mediocre offerings with hidden fees, is not the only shot being taken at the defined contribution model.
A Chicago Tribune column notes that Americans have lost approximately $600 billion in their retirement savings through 401(k) plans since the end of 2007, and are putting them to blame.
It's certain, then, that Congress will continue to scrutinize 401(k) plans, writes columnist Gail Marks Jarvis. "It seems 401(k) plans are being hauled out by Congress for a public stoning," she writes. "It's the catharsis many Americans need" due to what many say are "excessive fees and investment choices that are not always in their best interest."
As the Employee Benefit Research Institute notes, when the financial crisis began, 25% of Americans between the ages of 55 and 65 had 90% or more of their money in stock funds, and undoubtedly have suffered greatly, losing nearly half of their savings right on the eve of their retirement.
In addition, target-date funds have not held up well, particularly 2010 funds, which lost 26% of their value on average.
EBRI found in a recent survey that 58% think of the money managers in their 401(k) plan are "gambling," and only 13% of those near retirement are confident they will live out truly golden years.
Retirement Concerns Now Rattling the Rich
Forty percent of high-net-worth investors, those with $1 million or more of investable assets, excluding their primary home, are worried about the risk of outliving their assets, The Phoenix Cos. found in a survey. In 2007, only 33% had this concern.
A third of high-net-worth investors now expect to "make up for lost time" by saving longer and potentially more for retirement, and 44% said they will have to change their lifestyle in retirement, up from 35% two years ago.
Gen Y Tops Nation's Saving
Amazingly enough, Generation Y tops any other age group in saving: 44% versus 36% of the general population, Money Management International found in its financial literacy survey.
This is surprising, MMI noted, since Gen Y has been characterized as having a sense of entitlement, casual attitude toward work and authority, and high opinions of themselves. To some degree, there are tensions between Gen Y, Gen X and Baby Boomers, who have a hard time managing and retaining them as employees.
Regardless, as MMI puts it, "Gen Y exudes some admirable characteristics that are helping them navigate the current economic climate [because they are] educated and technologically savvy." Thirty-three percent believe it is their own responsibility to become financially educated.
Gen Y is also optimistic in the face of adversity; they tend to see a silver lining in adverse events, including the current recession.
"Even in these tough economic times, remember to pay yourself first," reminded Cate Williams, vice president of financial literacy at MMI. "Looking at your savings account as another bill that must be paid, may feel overwhelming when the bills are piling up, but you'll be pleased with your decision if an emergency were to occur-after all, having a savings cushion could prevent a financial setback from becoming a financial disaster."
Morningstar to Acquire Unit of Canadian Data Firm
Morningstar is acquiring the equity research and data business of Computerized Portfolio Management Services of Toronto for C$16.1 million. The companies expect to complete the sale in the second quarter.
"CPMS is a highly regarded firm with a long history of providing superior equity data and research to the Canadian investment community," said Scott Mackenzie, president and chief executive officer of Morningstar Research, the Canadian subsidiary of Morningstar. "Most investment managers in Canada use CPMS equity research and data, and by acquiring this business, we'll be able to expand our global investment data and research offerings."
Rick Przybylski, founder, president and CEO of CPMS, said, "As part of our long-term goals and objectives, we've always looked to expand our presence outside of Canada. Morningstar's global fundamental database, distribution network and reputation will provide opportunities to enhance our equity research and data business and expand our client base."
Mutual Fund Flows Return To Positive Territory in 1Q
Morningstar estimates that the top 25 mutual fund companies took in $12.4 billion in net inflows in the first quarter, with the research firm's Director of Personal Finance Christine Benz commenting, "I would imagine that the worst is over for a lot of these firms. It's hard to imagine a scenario that's worse than the fourth quarter was."
Indeed, in the fourth quarter, the top 25 fund firms lost $110.9 billion, and throughout the year, they lost $55.2 billion.
Bearing out this development, Franklin Resources reported last week that net outflows from its mutual funds slowed to $5.1 billion in the first quarter, from $18.7 billion in the fourth quarter of 2008.
"It's been another difficult quarter in the asset management industry, but we are pleased to see some positive developments, particularly around flows," said Franklin CEO Greg Johnson during an earnings call.
Likewise, Waddell & Reed reported net inflows of $1 billion in the fourth quarter, versus outflows of $1.8 billion in the previous period, and T. Rowe Price took in $4.5 billion in the first quarter, compared with outflows of $2.4 billion in the fourth quarter.
Perhaps directly correlated to this, Crane Data reported that money market fund assets declined by over $100 billion, or 2.6%, in the six weeks through April 22, the biggest decline since a $121 billion drop in the one week following Reserve Funds' Primary Fund breaking the buck on Sept. 15, 2008.
Confidence Index Jumps Considerable 12 Points
The Conference Board Consumer Confidence Index rose 12 points in April to 39.2 (1985=100), up from 26.9 in March, and the Expectations Index rose considerably to 49.5 from 30.2 the previous month.
"Consumer confidence [was] driven primarily by a significant improvement in the short-term outlook," said Lynn Franco, director of the consumer research center at The Conference Board.
"The sharp increase in the Expectations Index suggests that consumers believe the economy is nearing a bottom. However, this index still remains well below levels associated with strong economic growth," Franco advised. The number of consumers who said that business conditions are bad declined to 45.7% in April, down from 51.0% in March.
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