Byline: Reg Birchfield
Despite the setbacks caused by the devastation of fortunes following the global financial crisis, individual and organisational wealth is growing again, and surprisingly rapidly.
The wealth management industry is, therefore, under pressure to grow with the increasing demand to find safe and rewarding homes for the funds available. Globally, the wealth management industry business model is under pressure. Pre-crash, the industry was product obsessed, complex and reactive, and did not generate reasonable earnings growth, market share or margins.
New Zealand suffered the additional disaster dimension generated by a seriously unregulated finance services market that spawned poorly governed finance companies which, when they collapsed, took unwary investorsa[euro] savings and the money marketa[euro]s reputation down with them.
Now, with a formalised workplace savings scheme in place with KiwiSaver, the first wave of baby boomers reaching retirement age and, according to an ANZ Bank survey, a tide of small-to-medium size business owners and farmers looking to cash-up over the next five years, the money mountain is growing.
Opportunities undoubtedly beckon, but first there are some challenges the industry must confront, according to Paul Hocking, executive director of New Zealanda[euro]s Institute of Finance and Investment Professionals (INFINZ). For a start, it must improve its reputation and standing with retail investors to obtain greater public buy-in. Public confidence has been shattered by the finance sector debacle.
To lift the industrya[euro]s standing it must a[euro]improve transparency and information flowsa[euro], says Hocking. And to accomplish that, the industry must learn to live in a lower fee environment as management funds become more commoditised. Then there is the challenge of introducing performance fees a[euro]" poor performance, less fee.
And finally, says Hocking, as fees fall so will brokerage rates paid to advisers. Advisers will have to offer a broader service to take a fee directly from the investor. a[euro]This means the industry may become reliant on investors being willing to pay a kind of entry fee.a[euro] This will take some selling.
Hocking agrees that KiwiSaver has created the industrya[euro]s first real opportunity for growth in years. He sees the flow-on impact into other savings vehicles by KiwiSaver members as significant. And then there is the potential switch away from the traditional Kiwi addiction to property investment as tax changes level the playing field and drive more people to financial asset investments.
As New Zealanda[euro]s population ages and claims against an increasingly difficult-to-fund national superannuation scheme grow, so Hocking believes younger people a[euro]might finally grasp the need to undertake serious saving for retirement via the managed funds industrya[euro]. Then there is the possibility of an emerging annuities market as older investors look to turn assets into defined fund flows.
The wealth and asset management industry is, according to Hocking, changing in readiness to meet the challenges and exploit the emerging opportunities. a[euro]There is a realisation that the environment needs to change to transparency and openness, to lower fees and full disclosure.a[euro] Regulators and legislators in particular are determined to drive out old industry practices. a[euro]No longer will funds management be seen as a means of creating excess wealth for the manager without it being directly tied to the returns to investors, and then at very realistic percentages,a[euro] he warns.
John Cobb, chief executive of financial services company JBWere, thinks that new financial advisory legislation due to be enacted later this year is long overdue and necessary. It will, in his opinion, help a[euro]fire up the marketa[euro] though it will not a[euro]change things overnighta[euro]. …