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| We first need to recognise the type of society in which we live. My parents’ generation, born in the first half of the twentieth century, were brought up with very strict financial values. They were taught never to borrow and always to think of their financial future, quite simply because, if they did not, no-one else would. They were natural savers at almost all levels of society where savings were an option. In contrast, the new generation, born after the war, are consumers and spenders. They have access to, and use to the full, multiple sources of credit. They are not born savers. They have lived through an age of plenty where either government or employer would look after them in their old age and, whilst longevity has always been growing, it has done so at an unprecedented pace during their lifetime, rendering the financing of retirement a serious financial challenge.
Financial education
There is much talk of financial education as a means of encouraging people to save, but those advocating it seem to believe this will cover subjects like: “What is a mutual fund?”, “How should asset allocation be made” or “What is an annuity?” If that is what the proponents really mean, education is doomed to fail. This is a level of sophistication most investors will never reach. The real subjects for financial education are: budgeting, managing personal debt, the need to start saving early, and the miracle of compounding. Here government and industry both have a part to play. The recent initiative in UK, known as Generic Advice, possibly funded jointly by the industry and government, may be a start, if industry scepticism can be overcome. This, coupled with the advent of Personal Accounts and the FSA’s Retail Distribution Review, could give financial services companies efficient access to the mass market through the workplace, providing the industry really begins to understand customers’ needs and therefore the products they need to develop. Personal Accounts come into force in 2012 and require all companies to provide a pension plan for their employees into which both employer and employee pay. The Retail Distribution Review, amongst other things, identifies Primary Advice as being the giving of advice for simple products. This will have much less onerous regulatory restrictions and will naturally follow from Generic Advice. If accepted by the industry, these three initiatives together may provide the first seeds of profitable distribution into the mass market in UK. They may even be a model for others to follow.
Fund managers will not be able to play in this market on their own unless they have access to a large capital base, but they will, nevertheless, have a very important role.
Industry research in UK provides some very real evidence of what this segment of the market is seeking in order to solve its biggest savings challenge: finance in retirement. First the product needs to be simple. That does not mean that mechanics of the product need to be easy to understand but the outcome needs to be simple, related to the customer’s need and, at least to a degree, certain. A pension for these people means an income for life following retirement. It does not mean a lump sum at retirement. Thus the pension product needs to provide a minimum income but the whole risk of longevity cannot be left with the customer. Therefore, deferred annuities have a role to play, together with some kind of declining term life cover in the early stages of saving. A pension is no good to anyone if they die leaving a wife and two children when they are forty! The product must also be cost effective. A 150 basis point management fee compounded over forty years does not fall into that category.
Think differently
These requirements mean investment managers must think differently. First, it is unlikely that the mutual fund, and certainly not a choice of hundreds of them, is an option. The product needs to look more like an endowment policy. Secondly there is a need for some form of minimum guaranteed income in retirement and therefore there is going to be a role for insurance companies. Fund managers will not be able to play in this market on their own unless they have access to a large capital base, but they will, nevertheless, have a very important role.
These are not easy challenges and require cooperation with a number of agencies: government, regulators, employers, providers of capital, and probably the media and consumer groups as well. Success will bring two things: investment managers will, for the first time, serve the whole savings market rather than oversupply only part of it with masses of “me too” products, and the long term savings pool will become vastly bigger. The result must surely be much enhanced profitability. |
| Most people in the industry believe that operating at the bottom end of the market is rather mucky. For those who are understandably unfamiliar with English epithets, “Where there is muck there is brass”, in this context, means there is money to be made at the bottom end of any market.
Most ordinary people on average earnings need our help if they are to have any hope of retiring on a sustainable income.
Recently I attended an investment management roundtable at which members were asked which customer segment they would like to study at the next meeting. Ninety percent of respondents voted for the High Net Worth Individual. It occurred to me then that not only were we probably missing an opportunity to tap into a huge savings pool lower down the wealth market but most of us were probably setting ourselves up to fail. There must be many thousands of investment management firms around the world and only a few will really be able to make money out of the demanding world of the HNWI.
The remainder of the respondents voted for the so-called Mass Net Worth market. This is a segment in which huge sums have been spent trying to access the non-US market profitably. I remember Merrill Lynch, before they decided to specialise in sub prime mortgages, joining up with HSBC to spend USD1 billion pursuing the Mass Net Worth market world-wide, but the project quietly disappeared after only a year. On the Continent, it is an area in which the banks dominate. How successful they are is by no means clear and, from the perspective of investment managers, the extent to which they open their architecture varies considerably. However, it will no doubt be a battlefield on which much blood is spilled in the future. The key will be to maximise the use of technology and provide products which are at least sometimes profitable for the client.
The bottom end
But it is down at the bottom end of the market where no-one plays. By “down at the bottom end of the market” I am not referring to those on social security benefits but to the mass of the population – to most ordinary people on average earnings – those who most need our help if they are to have any hope of retiring on a sustainable income. It was a part of the market in the UK, which, in days gone by, was served by the so-called industrial life sales forces epitomised by “The Man from the Pru”, a figure complete with bicycle clips who went round the Public Housing Estates and collected the premiums for the residents’ life policies in cash every quarter. As regulation became more onerous, these sales forces disappeared, along with almost all the direct life sales forces in UK. As a result whole swathes of the population ceased to benefit from any financial advice whatsoever.
Economists have often professed to be mystified by why the UK savings ratio declined progressively from the late eighties onwards. They never seemed to connect this event with the gradual demise of the direct sales forces. Both began more or less contemporaneously.
As one of my bosses used to say, however, “We are where we are” – a phrase I always found infuriating, but that makes it no less apposite. The question is: How do we once again access this very large pool of savings profitably? The answer, I suspect now, is that we cannot, without help from both government and the regulators.
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