Advisers are poised to see a significant amount of new money coming their way by the end of the decade.
By 2020, $1.5 trillion is expected to flow to defined contribution and retail investment markets as money continues to exit pension funds, endowments and foundations, according to a new analysis by asset management consulting firm Casey, Quirk & Associates.
“It's a big boon for advisers,” Ben Phillips, a partner at Casey, Quirk, said.
As baby boomers continue to retire at a fast clip —
10,000 are turning 65 every day — they're taking distributions from their pension plans and moving that money into retail accounts such as IRAs, Mr. Phillips said.
At the same time, individuals are shouldering more responsibility for their retirement as
corporations continue to adopt DC plans in favor of traditional pensions.
By contrast, the institutional market, made up of defined benefit plans, foundations, endowments and insurance general accounts, will see net outflows of $880 billion due in part to America's changing demographics and a turn away from traditional pension plans.
REGULATION MAIN DRIVER
The exodus of money from institutions to individuals will have a profound impact on the advice market, with regulation likely the largest driver, according to Casey, Quirk.
“As individuals represent more of the [asset management] industry's future potential, policymakers will want to get more involved,” Mr. Phillips said. “It becomes more of a consumer protection issue.”
The Labor Department's
fiduciary rule-making endeavor is one example of such regulatory intervention, he said.
Particularly, any rule-making going forward will likely encourage more “discretely priced,” or transparent, investment advice in the retail market, by eliminating revenue sharing through mutual funds, for example, which investors may not be aware they're paying. Each part of the advice chain will have an explicit fee associated with it, Mr. Phillips explained.
BUSINESS MODELS MAY CHANGE
Further, asset managers are going to have to rejig their adviser-facing business models as more assets flow away from institutions.
For example, asset managers have traditionally segmented their wealth management and DC wholesaling forces; however, as
more advisers pivot toward the 401(k) market, those wholesalers will need to be knowledgeable about both areas of distribution to attract advisers, according to Mr. Phillips.
“Increasingly, I think what they're trying to do is find asset managers who can talk across the spectrum of wealth management and defined contribution,” Mr. Phillips said. That means investment management shops will need to at least cross-train both wholesaling forces to build a holistic knowledge base, he added.
The same asset flow phenomenon in the U.S. is occurring internationally as well, according to the Casey, Quirk's new report, “The Roar of the Crowd: How Individual Investors Transform Competition in Asset Management.” While individuals — the retail and DC market — accounted for more than 90% of net global organic growth in 2014, they'll account for all of it and more by the end of the decade, representing almost 120% by 2020.
