The ‘big four’ financial services industry trends
Do you know the four trends that have dominated the financial planning industry over the past 40-years? If not then the findings of a recent Financial Planning Standards Board (FPSB) global position paper will interest you. The paper, titled The State of the Financial Planning Profession in the ‘Post Trust’ Era, takes an in-depth look at these and other key industry issues.
It’s all about the consumer
The first key trend identified in the paper is consumer demand. Consumers have been forced to change their savings behaviour in response to market shocks, life expectancy, poor financial decisions and significant shifts in the pensions industry. The once ‘guaranteed’ defined benefit pensions enjoyed by previous generations are a thing of the past. How bad have things become? The paper refers to Mercer’s 2009 Defined Contribution Survey which “highlights the increased global prevalence of defined contribution plans [as] part of a shift of investment responsibility and risk for retirement planning from corporations to households.”
Individuals on defined contribution plans know they will have to take additional steps to secure a comfortable retirement. But they don’t appreciate the dangers posed by unexpected market events. In February 2009, the Center for Economic and Policy Research revealed that “the median US household with a person between the ages of 55 and 64 saw its wealth fall by nearly 50 percent between 2004 and 2009!” The FPSB paper provides a raft of statistics to demonstrate the impact of changing age demographics on retirement savers. They note the 60-plus population will increase by more than 50% over the next four decades – from around 264 million people in 2009 – to 416 million by 2049! The problem is exacerbated by declining working age populations and low growth rates.
The FPSB paper concludes: “As more individuals and households grapple with issues like longevity, a shrinking workforce, declining wealth and market complexities, the need for competent and ethical financial planners who work in the client’s interest becomes even more evident.”
Changing the way things are done
The second trend is the shift from transaction-based systems to relationships and open architecture. “Merrill Lynch/Capgemini’s 2009 World Wealth Report found that wealth management firms are moving toward more dynamic, needs-based client service approaches, applying advanced segmentation and analysis to the traditional assets under management (AUM) model that was once embraced as industry standard,” notes the paper. The days of lumping clients into one of four or five pre-selected investment categories are over. The biggest challenge in this area is to ensure the client receives the appropriate level of financial advice. Experts disagree on where this advice should come from. In recent years the product providers have become more involved in the advice giving stage, though some question whether this is appropriate given the potential for conflicts of interest. A product provider will – for the most part – be swayed in its attempts to provide impartial advice by its profit motive.
South African financial intermediaries are extremely familiar with the third trend – regulatory change. Financial services providers have to be licensed and operate within the provisions of the FAIS Act and the General Codes of Conduct. The Financial Services Board (FSB) is coming down hard on financial services providers who fail to render adequate levels of advice. The trend is definitely toward further regulatory intervention – whether it be educational requirements as demonstrated by the 2010 introduction of a mandatory FAIS Regulatory examination – or changes to commission rates and structures.
Getting used to a smaller world
The fourth and final trend introduced in the FPSB paper is that of globalisation. “Strong economic growth in one part of the world can help stimulate growth in other parts of the world, and the global financial crisis has shown that the opposite also is true!” Clients are more clued up than ever before and require comprehensive advice to fulfil their offshore asset allocation needs. There is also an increasing trend of wealthy residents retiring overseas.
The Association of Americans Resident Overseas estimates the number of US citizens not affiliated with the US government living abroad at nearly 5.26 million! These people end up in Mexico, Canada, the UK, Germany and Israel. South Africans are on the move too with more and more wealthy citizens moving to Australia, New Zealand and the United Kingdom. Financial advisers are increasingly expected to have an understanding of investments and regulatory issues in cross-border situations.
Editor’s thoughts: There’s never a dull moment in the financial planning industry. Each of the trends mentioned today should dominate financial services decisions through the next decade and beyond. Would you agree with the four trends discussed in today’s newsletter – and which of these trends affects your business most? Add your comments below, or send them to gareth@fanews.co.za
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