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Advisors, brace yourselves!

By Reynaldo Marquez | June 18 2006 08:25PM

The next eight years will see some big changes in the Canadian wealth management industry.

The Canadian wealth management industry is poised to undergo an upheaval in the coming eight years, as affluent households turn increasingly toward packaged investment solutions rather than stand-alone products. Advisors who do not adapt their business strategies to this new reality run the risk of being be left behind.

This, in a nutshell, is what Earl Bederman, the president of the financial research firm Investor Economics, warned a group of financial advisors in April during a presentation on the 2004-2014 outlook for the Canadian wealth management market. Mr. Bederman was speaking at a conference organized by the Conseil des fonds d’investissement du Québec in Montreal.

According to Mr. Bederman, we are seeing a major trend unfold in the wealth management industry, whose core is moving away from stand-alone product sales to specialized financial advisory services.

Investor Economics' statistics show that, in 1997, 46% of the wealth management market was held not by providers of stand-alone products, but by investment advisors. In 2004, this proportion was up to 61%. By 2014, it is expected to climb to 72%.

Mr. Bederman believes that the trend toward integrated asset management has gained a great deal of momentum and will continue to do so, in large part because Canadian households are growing older and increasingly affluent. Longer life expectancy means that individuals aged 55 and over will continue to accumulate capital. This stands in sharp contrast to the propensity in the 1990s to focus on sales of stand-alone investment vehicles such as mutual funds.

In a follow up interview with The Insurance Journal, Mr. Bederman reiterated his take on the situation. “The trend toward managed assets means there’s a shift away from product to packaged solutions…And it’s about households that represent the high end of the market,” he said.

The result is that stand-alone mutual fund sales will peter off, while packaged asset management products – including wrap accounts, fee-based management services and discretionary management services – will pick up speed.

Mr. Bederman also feels that the emergence of new products that have proven popular with Canadian households, including linked notes, will also contribute to the slowdown of stand-alone sales. “If you look at the development of the fund industry, 15 years ago it was all vanilla. Nowadays it is different: new products have come into the market place that represent a form of competition for mutual funds.”

Catering to the market

Greater demand for these types of services will be driven in large part by affluent Canadian households with more than $500,000 in assets, as well as top-tier investors who have accumulated more than $1 million in assets in recent decades. Individuals aged 65 and over, specifically, will be actively seeking out risk management services and intergenerational wealth transfer strategies.

Mr. Bederman identifies these households as the population segment with the country’s largest concentration of assets. Based on his projections, this trend will hold fast as the population continues to age, with the assets held by these households expected to leap from $1.4 billion in 1999 to $4.0 billion in 2014. The wealth of these households is based on the total assets owned, be it in bank accounts or in stocks and bonds.

In 2004, he emphasizes, 62% of the Canadian asset management market was held by clients aged 55 and over, which translates into 5.6 million households. This proportion will grow to 66.6% in 2009, or 6.2 million households, and 71.8% million, or 7.4 million households, by 2014.

“A little more than 50% of this wealth is invested in fixed income and money markets. These are low yielding instruments,” Mr. Bederman points out. He nevertheless maintains that the portion invested in equities will continue to rise in the coming years, driven by consumers’ desire to see their investments gain in value.

Mr. Bederman confirms that equities accounted for 38% of Canadians’ investment portfolios in 1999, compared to 43% in 2004. The percentages will continue to increase in the coming years.

He has also seen the emergence of new types of investment vehicles known as hybrid products. Examples of these products are linked notes, wrap funds and index funds.

These products are expected to occupy an increasingly larger share of Canadian investment portfolios, with more than 4% in 2014, versus 1% in 1999, says Mr. Bederman.

Intergeneration transfer

He also cautions advisors not to expect to make a fortune in the transfer of wealth from one generation to the next.” It is not as simple as it sounds. Intergenerational transfers and inheritances will not result in the massive opportunities that a lot of people believed.”

Why? Put simply, inheritors may not automatically reinvest their fortune in the same mutual funds as their predecessors. “It is a naive view of the world,” says Mr. Bederman. Many of these assets fall into the hands of surviving spouses.

Moreover, he points out that the number of transfers will be lower as life expectancy continues to get longer.

Advice for advisors

Increased demand for packaged solutions and the declining popularity of stand-alone products presents a challenge to advisors in terms of adapting to new market realities.

As a result, Mr. Bederman maintains that fee-based management will see greater growth between now and 2014. Stand-alone mutual fund sales will no longer be the engine of growth, he warns.

“Mutual funds are a tremendous instrument, but they are ideal for the mass affluent… They will be less attractive for higher net worth households who will become increasingly more interested by packaged solutions.”

As it stands, however, many advisors are not ready for these changes. Mr. Bederman explains that most financial advisors and mutual fund representatives have earned their success by selling their products to a mass market.

He emphasizes that there is a gap between packaged solutions and the expertise advisors can offer to affluent households. But there is currently no motivation to address this gap.

“Participants need to find ways to position themselves and identify growing market segments. They need to find ways to use mutual funds as their gateway to more promising niches.”

Are investment and insurance firms ready to face these new market realities?

Mr. Bederman indicates that a number of fund managers, including CI Financial, MacKenzie Financial and Franklin Templeton, have kept their fingers on the pulse of the market and put their focus on wealth management. Players that have experienced difficulties in marketing new packaged solutions on their own have teamed up with investment banks in order to respond to the growing demand for these types of products.

According to Mr. Bederman, insurers are also taking the wealth management leap. And he feels that insurance companies are in an excellent position to adjust to this new trend. “The demand and needs for insurance and wealth protections and mechanisms to support intergenerational transfers are going up,” he explains.

Although insurers have developed packaged products, they still need to devise mechanisms to retain the assets of clients who decide to retire. When clients reach this stage, insurers often see their assets transferred to deposit-taking institutions. “Even if they have these mechanisms, it doesn’t necessarily guarantee that they will retain the wealth,” says Mr. Bederman.

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