Demographics could spawn a huge boom
in the next decade.
The demographic wave of baby boomers approaching
retirement is likely to spawn a feeding frenzy of major proportions in
the financial services business over the next 15 years, predicted
former T. Rowe Price vice chairman Jim Riepe.
Speaking at the 12th Tiburon Strategic Advisors CEO
Summit in San Francisco on April 18, Riepe told the 100 or so top-level
executives in attendance he suspected many mediocre providers of
financial products will "continue to survive for a while," thanks to
the tailwind of investor demand. "In the long term, they'll feel the
pressure," Riepe added.
But the financial services industry also has an
obligation to educate savers. Riepe recalled that when, as a young man,
he purchased his first insurance policy from a fellow University of
Pennsylvania alumnus he was not informed that most of his first few
premiums went to his friend. "Strategies based on not knowing how we
[financial services companies] are getting paid" probably will be
challenged at some point in the future. "Hedge funds have been given an
absolute pass on fee disclosure," Riepe declared.
This will eventually change, however, as he cited
Goldman Sachs's synthetic hedge fund as an example. And the dynamics of
financial services are likely to transition from "product push to
investor pull."
Part of the problem comes from consumers themselves
and from real versus perceived value. "It sounds perverse but people
would rather pay hidden charges than disclosed charges," he
acknowledged. "This industry is selling something where the outcome is
uncertain. That's not true with shampoo, toothpaste or refrigerators.
Those with the capabilities to make guarantees need to act like
fiduciaries even if they aren't required to do so by law."
Riepe's remarks about fiduciary responsibility fit
into the theme of the Tiburon CEO meeting, where several speakers
alluded to the changing landscape of financial services distribution in
the United States. Chip Roame, CEO of Tiburon, noted in his opening
remarks that longevity remains the huge wild card out there for
advisors and financial service companies alike.
And the major clients of most advisors are going to
live longer than other Americans. "The average American lifespan
doesn't matter," Roame said. "You don't go after drug dealers or
murderers," or criminals and others who exert a significant downward
influence on average life expectancies.
This theme was picked up on by John DesPrez, CEO of
John Hancock Financial Services and Manulife Financial. With life
expectancies doubling since 1800, the future of insurance is changing
as well. " 'Life' insurance is replacing 'death' insurance, and the
insurance industry is starting to sell products that pay you if you
live," DesPrez said.
In this context, portfolios like life-cycle funds
are becoming necessary because "you need low volatility to provide
guarantees." Even for one of North America's largest life insurers,
these issues remain challenging. "The biggest problem is we don't know
how long we're planning for," DesPrez explained.
In keeping with the meeting's emphasis on the need
to listen carefully to your clients and prospective clients, the
inaugural "Ask the Distributors" panel delivered the goods. Four
major distribution firms each provided insight on how they serve their
constituents and also how they would be receptive to hearing from the
manufacturers in the financial services business.
For example, Ron Cordes of Genworth's AssetMark
described how for the first time his firm engaged a professional survey
firm to interview investors across America. The findings proved to be
valuable for the advisors using AssetMark in that investors are very
concerned about their advisors ability to offer and implement a
solution that would safeguard them from outliving their savings. Cordes
went on to say that AssetMark will use the findings to create product
solutions for his advisor clients to use in addressing this major
concern of the investing public.
Both Bill Dwyer of LPL and John Iachello of Pershing
Advisor Solutions empathically made the observation that what advisors
are looking for are solutions-solutions for their business practice and
solutions for their clients' wealth managemen tneeds. Skip Schweiss of
Fiserv made a provocative observation that "the need for more
transparency is bunk, clients don't care-they want to feel comfortable
that their advisor knows what is in the prospectus." He also
articulated a point that all panelists agreed upon and that was
contrary to the popular press: Most advisors are still using mutual
funds and making very little use of hedge funds.
Yet a handful are. Steve Lockshin, CEO of Lydian
Wealth Management, noted that "every fund that is worth investing in is
closed before it's open." Lockshin also indicated he and his clients
were willing to pay for performance. "Who cares if Steve Cohen [of SAC
Capital] charges 550 basis points" as long as he delivers, Lockshin
asked rhetorically.
A breakout session on mergers and acquisitions
revealed that large investment companies and small advisory companies
wrestle with many of the same issues. Peter Bain, senior executive vice
president of U.S. Asset Management at Legg Mason, observed that "we
will never do a deal that is someone's exit strategy. We want guys who
want to die with their boots on. Odd as it sounds, we won't do a deal
with someone who's in it for the money. In more than half the
acquisitions we've made, we weren't the highest bidder."
With Putnam's sale to Canada's PowerCorp just
completed, Putnam CEO Haldeman candidly provided first-hand insights on
industry consolidation trends. Haldeman also provided a modest and
candid discussion of the challenges and triumphs during his tenure as
chief executive of this venerable Boston-based investment firm.
He emphasized that he has encouraged all employees
of Putnam Investments to think of the firm less as a mutual fund
company, and to focus more on the trusted position they hold when
providing stewardship and management of "other people's money." To add
to his points, he provided an example of the firm's compensation plan
for portfolio managers that is based "20% on one-year performance, and
40% each on three-year and five-year performance," with an emphasis on
finishing within the upper half of their competitive peer group
averages. To emphasize the goal of "consistent," Haldeman said that
"portfolio managers don't receive any more for being in the top decile"
of those peer group rankings as a means of discouraging more volatile
results.
Clearly, Haldeman had faced more difficult audiences
with state and federal regulators, as well as previously disenchanted
institutional clients and their consultants, though he answered even
the toughest of questions from this audience with an inspiring degree
of authenticity and an equally engaging sense of humor.
Paul Stevens, in his role as president and CEO of
the Investment Company Institute (ICI), described the ICI's role in
influencing public policy. Stevens detailed the specific activities the
ICI has undertaken as it seeks to execute its mission to advance the
interests of mutual funds, their shareholders, directors and advisors
and to encourage adherence to a high ethical standard and finally, to
promote public understanding of mutual funds.
"Today's lame duck president and divided Senate and
House will likely result in little real progress on a host of important
issues related to taxes, regulation and retirement security," Stevens
said. He also noted that many of the oversight committees lose sight of
the fact that consumer sentiment around the mutual fund industry
remains highly correlated to stock market performance.
"Investors invest in mutual funds to make money, and
if the markets go down the level of satisfaction and investor
confidence goes with it," he noted, observing that Washington
regulators typically respond to the correlation by increasing oversight
and regulation, which is not necessarily in the interests of anyone.