Live from San Francisco: Tiburon’s 23rd CEO Summit

Chip Roame’s opening remarks at Tiburon’s CEO summit focused on baby boomers and the trust gap between consumers and financial service firms.

Chip Roame delivered the opening keynote presentation “The Future of Financial Services” in front of some 200 executives at the 23rd Tiburon CEO Summit Tuesday with his trademark shotgun-like delivery of statistics on the economy, the consumer and industry trends.

The wave of baby boomer retirees will clearly push more money into their market, he told the crowd, which consisted mostly of chief executives of financial advisory firms. Consumer households currently hold some $30 trillion in investable assets, double the amount they had ten years ago. There’s an additional $14 trillion in retirement assets, much of it held by those nearing retirement.

The first baby boomers turned 65 in 2011, and some 10,000 will reach that age every day between 2011 and 2029. Yet the majority are unprepared for retirement: 57% have less than $100,000. Couple that with the “twin threats” of elder care and post-college age kids moving back home due to lack of jobs, potentially higher tax rates and lower social security benefits, there is a need for financial advisors among this group.

Less clear is how attractive folks with meager assets will be as clients. What is clear is that the industry isn’t attractive to consumers. Roame reminded the crowd of the recent scandals: The $5 billion loss at J.P Morgan caused by the rogue “London Whale” trader, MF Global, Knight Capital Group, a $2.2 billion trading loss at UBS, even the Facebook IPO – all serving to lessen the financial services industry in the public’s esteem.

Roame cited a Harris poll that put only tobacco and government lower than financial services on a reputation scale. And while it’s true that clients tend to love their personal advisor while simultaneously being suspicious of the industry, closing the “trust gap” should be a priority, he said.

Regulators aren’t exactly helping. Roame pointed to the seemingly endless debate – and some 4,000 meetings, according to Roame - over Dodd-Frank, only one-third of which has been implemented – and, he points out, the banks have only gotten bigger since the regulation passed. “When Sandy Weil calls for the return of Glass-Steagall,” it’s probably an indication things aren’t getting safer for financial service firms, Roame said.

Roame also spoke of the low interest rate environment that’s seen many firms waiving money market fund fees and the forced exits from annuities and other insurance products.

Where is the money going? Fixed income and alternative asset classes, largely. ETFs and hedge funds saw positive fund flows in 2011, while mutual funds saw $15.5 billion net outflow during the same time, driven largely by exits from money market and equity funds. Fixed income funds, on the other hand, saw $120 billion net flows in 2011 (equity funds, by contrast, lost a net $75 million and money market funds a net $100 million.)

The increase in fixed-income funds may in fact be leading to the next big asset implosion when interest rates eventually rise.

Another trend is the increase in mutual fund advisory programs and the financial advisor directed fee-account programs – these have dominated net flows among fee-based accounts. Mutual fund advisory programs had net flows of $90.3 billion in 2011, while the so-called “rep-as-portfolio manager” and “rep-as-advisor” programs together had net flows of close to $100 billion.

“Reps as portfolio managers are collecting all the assets, but usually have the worst performance record,” Roame said. So while intermediaries like asset management providers and sub-advisors add on layers of fees, their performance tends to be better.

Roame suggested the future may belong to advisors who help clients not by picking the right investments for them, but by ensuring they have the right kinds of accounts for those investments and taking a more holistic approach to seeing the client’s financial data in total – many have a dozen or more accounts spread out over workplace retirement accounts, old brokerage accounts, etc...helping consolidate those into a single investment strategy will be key.

Another data point: While the trend of the so-called “breakaway broker” from wirehouse to independent continues at a steady pace, it’s worth noting that while 42% of advisors are independents, up from 30% in 2005, their share of assets has only grown to 35%, up five percentage points from 2007. Wirehouses, by contrast, employ only 27% of all financial advisors, yet hold 57% of assets.

The holy grail of the independents? To serve the mass affluent market cost efficiently. Roame pointed to Ric Edelman’s Edelman Financial Group as an example of how to do this: 18,500 clients with $8.5 billion under management, and an average account size of $500,000.

The difference, Roame pointed out, is marketing: “If your aspiration is to be big, marketing is the game,” he said.

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