Gone are the days when financial advisory could boast the same professional stability as a well seated doctor or lawyer. Herding people through the door and offering them a standard 60/40 portfolio invested in the in-house equity and bond funds was a simple and lucrative business model but it does not work anymore. Competition and technical innovation have already changed the industry of professional personal investment advisory and it will be sure to effect radical change for years to come.
Today, the average retail investor is faced with a dizzying amount of savings account types (each with their specific tax advantage) and an even bigger amount of instruments to put your money in. The upside of such competition is obviously that prices have gone down and the scope of diversification increased significantly. The downside is that the market has become incredibly complex to navigate.
President Barack Obama contributed to the average investor’s confusion this week by proposing the tongue twisting MyRA (My Retirement Account) presented as such:
Obama introduced the new plan like this: “MyRA guarantees a decent return with no risk of losing what you put in.” On Wednesday, the administration said it will launch a pilot program of the “new, simple, safe and affordable ‘starter’ retirement savings account” by the end of the year. Bloomberg’s Richard Rubin has the details here. The early verdict: MyRA is intriguing but limited.
We would not venture into the political mind field here to take a stand on whether this is a sound proposal or not. But, we would nod in agreement with Ben Steverman, a Bloomberg reporter, in his argument that one of the main positives to come out of this is probably that it will make Americans think about retirement. As such, the simple fact is that individuals aren’t saving enough to main an adequate level of consumption in retirement.
Even a cursory glance at the data is enough to alert you to the fundamental dilemma. Aggregate demand in the US and elsewhere in the OECD is structurally impaired which favors more consumption (and investment), but individually we are headed for a pension disaster. The following table from the OECD is illuminating in this regard and last we year we covered the topic in a report on housing and demographics.
Two issues are important to focus on [in the context of pension and saving in the OECD] .
1. What is the private pension coverage rate? This is to say, how many individuals in the work force are saving for their own retirement independent of public and mandatory pension schemes.
2. How much are consumers saving? One crucial question for example is whether individuals are saving enough to smooth consumption and thus maintain a stable (and independent) level of income in retirement. This is referred to as either gross or net income replacement rates.
The conclusion from looking at the data is unequivocal. The current private pension coverage rate in the OECD is too low and the income replacement rate from private pensions is no where near sufficient to secure a stable retirement income.
Demographics Cassandras are two for a buck these days and we would not count us among these. However, it would be foolhardy not to recognize the challenges that lie ahead. We doubt that financial innovation can come to a full rescue of starved pension accounts, but we were nevertheless intrigued to read a recent piece from Bloomberg news that the big guns in the fund and retirement management industries are enlisting financial/technological entrepreneurs in the fight to bring funds in.
Vanguard Group, which manages $2.45 trillion in assets, announced Jan. 22 that it has struck a deal with one of them, a Washington, D.C.-based start-up named HelloWallet. (Other players in the online advice game include Wealthfront, LearnVest, Betterment and Personal Capital.) Calling itself a “financial wellness service,” HelloWallet will become an option for the almost 4,000 defined-contribution retirement plans that Vanguard runs, potentially making its tools available to 3.5 million workers.
On the face of it of course this is nothing more than a wealth manager seeking out alternative and creative ways to increase AUM. However, the notion that nudging, peer pressure and targeted information can help people make smarter savings decision is interesting in our view.
Overall, US consumers have increased their spending on portfolio management advice in recent years. To the extent that the positive trend in the chart below is a sign that US consumers are getting increasingly interested in managing their savings we would count that as a positive (for society as a whole and not merely for the esteemed fund management industry).
A word of caution seems warranted though. If we look at the share of real consumption expenditures (ex food and energy) in the US spent on portfolio management advice it tends to peak just before recessions. It would then seem that when it comes to thinking about investing cleverly for retirement, you can indeed get too much of a good thing.