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.