If Wall Street needed a cover boy for its embattled state of affairs, they found one in Securities and Exchange Commission Chairman Harvey Pitt. "Even my younger children can cite chapter and verse about the lack of public confidence in the securities industry, the accounting and legal professions and those of us who regulate them," Pitt told attendees during his keynote address at a recent Investment Company Institute general membership meeting. More than 1,200 fund and financial services executives attended the conference in Washington, D.C.
Pitt has been lambasted by the media for months in stories quoting executives calling for him to step down because of his prior dealings with many of the scandal-riddled companies he's now charged with regulating. But during his address, it was difficult to tell if Pitt was being sarcastic or trying to make the best of a bad situation. In any event, the speech by the regulator of the largest and most lucrative capital markets in the world did little to dispel the growing reality that business as usual just isn't cutting it these days-at least not in the financial services industry.
The fund experts, brokerage executives and demographic gurus who gathered at the ICI conference discussed not only how the world and investors' perceptions of it have changed in the past six months, but also how the financial services industry is struggling- and in some respects failing-to keep up.
The horrible events of September 11 accelerated many profound consumer changes, but it did not create them, said J. Walker Smith, a futurist and managing partner at Yankelovich Partners. "We're seeing more value changes today than at any point in the last 30 years, and there is no doubt that it's roiling and changing the future for business," Smith said. "September 11 no doubt accelerated these shifts and makes values more salient."
What does this mean for financial service executives and investment advisors?
The great news is that investors clearly want and believe they need more help. The bear market is enhancing that sentiment. But it is also being driven by the dawning recognition that people have better things to do with their time, like spending it with family or on hobbies or leisure. "People are telling us they want to spend less time and energy managing their finances-a boon for advisors," said Smith.
Still, understanding the emergence of consumers' "new" attitudes and the aggressive reprioritization of their values will be intrinsic to future success. These shifts fundamentally affect consumers' approach to the market and how they view themselves, Smith said.
What is propelling such changes? Too much stuff, and the realization that it can't buy happiness. Smith's phrase for consumers' reaction to more than a decade of conspicuous consumption and radical materialism is "the claustrophobia of abundance." People have so much stuff today that they're suffocating. They have stuff falling out of closets. It's overflowing attics, basements and garages. The number of self-storage units in the United States has tripled in the past decade. In the context of the stark prosperity of the last decade, people have bought more and more and realized that they felt worse and worse, Smith said.
Another great Yankelovich phrase to describe the phenomena of too much stuff: the prosperity paradox. According to futurists such as Smith, consumers admit in survey after survey that in households living above the poverty level, there is zero correlation of wealth to happiness.
That doesn't mean investors will be starting communes and relinquishing all worldly possessions any time soon. In fact, quite the opposite is true. Consumers of all income levels believe they are entitled to products and services that once only the wealthy could afford. Smith calls it "the mainstreaming of affluence."
In short, growth opportunities of the future won't be tied to the accumulation of more things; they will be tied to the perception that consumers (and the advisors they hire) are adding value to their lives. That is worth remembering when it comes to positioning your firm and its services. It's not about more gourmet coffee; it's about better or more exotic gourmet coffee, challenging vacations, more personal choice and a greater quality of life. "It's a complicated phenomena, but we believe that what consumers are asking for is help preserving their affluent lifestyle so they can find greater fulfillment," says Smith.
Which brings us to some of the roadblocks and obstacles investors believe are standing in the way of these lofty goals: more volatile markets, continuing corporate securities scandals and a constant threat of more terrorism in our own backyard.
Put another way, what do investors want in a world where they're told we're fighting a war that may never end, that another terrorist attack is imminent and that the stock market has tanked again? Comfort, security and in some cases a guarantee, broker-dealer executives like Jay L. Lewis, president and CEO of Nathan & Lewis Securities Inc., told the audience.
One way to provide comfort? "I'm intrigued by guaranteed-principal account products, which provide the full upside potential but use insurance to protect against the downside," Lewis said at the ICI meeting. "I believe that investors are willing to pay a little extra to take the anxiety out of investing, and such products could move money back into active management." So far ING, Idex and Phoenix Insurance Co. are offering guaranteed-principal accounts, which use insurance to protect against mutual fund losses.
Lewis also underscored the need for more and better financial planning. "Investors are depressed. Brokers are depressed. The planning process will never fail us or them," he added. But it may mean that companies have to reach out to planners to help them streamline their businesses. "Today, planners have too many clients, stocks, funds. We need to help them segment their client base and rationalize their offerings," Lewis added. By assisting planners with the creation of cogent businesses, they in turn will be able to add value to their relationships with investors, he said.
Another way to provide investors with more security? Targeted communication and more strategic and deliberate advice, said Robert Eaton, managing director of retail marketing at Merrill Lynch Investment Managers. "We're getting away from products and moving to solutions," Eaton said. That means evolving the way they communicate and wholesale to advisors. The push, he said, is away from the latest product and toward helping planners understand and service their database and book of business. To do that, Merrill is working hard to offer platforms that integrate technology with advisors' databases, which will drive the solutions orientation the giant broker-dealer believes is essential to advisors' and its success.
The goal is simple: Merrill wants advisors to capture and manage more assets. Now, more than half of Merrill's $1.2 trillion in assets is unmanaged. "This represents a tremendous growth opportunity," Eaton said.
As part of the bid to add value, vehicle boundaries will come down, too, Eaton predicted. He says platforms that combine retirement and nonretirement accounts invested in separate accounts, mutual funds, exchange-traded funds and individual stocks and bonds are just around the corner. "This will have profound implications for how we run our business," he said.
It also has profound implications for the way brokerage firms and planning shops develop and deploy technology. On the one hand, immediate access via the Web "has made everyone a better shopper," says F. William McNabb III, managing director of the Institutional Investor Group for The Vanguard Group Inc. "But the challenge is that consumers have higher and higher expectations of better service."
Technology for technology's sake just won't work anymore. The response of consumers who get bogged down in phone or web technology is to characterize it as "overdeployed, intrusive and impersonal," Yankelovich's Smith says. "We still need to find the transformational opportunities."
Reaching Consumers In An Uncertain World
A never-ending war, the threat of more terrorist attacks, executives who run their companies into the ground for their own enrichment and accountants who help them. It's no wonder investors' attitudes are rapidly changing. Here are some new ways to target clients' evolving values, according to experts who spoke at the recent ICI general membership meeting in Washington, D.C.
Appeal to investors' sense of affluence, not their ability to accumulate more things. Quality time with family, a rewarding career, philanthropy, a sense of community and spirituality are beating out the promise of being able to buy more stuff, according to futurist firm Yankelovich Partners Inc.
Take the weight off their shoulders. A growing number of people want to spend their "spare" time with family and friends, not undertaking the daunting task of managing their own money.
Try guarantees. Growing evidence from Yankelovich and others shows investors are willing to give up some upside and even pay more for a guaranteed return. One suggestion: Guaranteed-principal accounts, which are mutual funds whose returns are guaranteed with an insurance rider. Such guarantees, which could add 50 to 100 basis points to an investor's tab, may help move more money off the sidelines and back into the market.