Roame is a “naysayer” on target date funds. He believes these funds are being misused, as retirees are holding additional funds (primarily equity funds), resulting in sub-optimal overall asset allocations. He said target date funds “are a nice idea, but they are not being used correctly.”
Packaged fee accounts have grown substantially over the past eight years, to $1.5 trillion in assets. Roame forecasts these becoming increasingly popular as baby boomers retire and liquefy their assets into these accounts.
Roame pegged the U.S. hedge fund industry at $1.9 trillion, larger than the ETF and SMA markets combined. “Hedge funds are by far the most profitable segment of the industry, making more than the rest of the industry added together,” says Roame, although this was qualified by the fact that much of this profit is in the form of carried interest.
There are approximately 400,000 financial advisors in the U.S. today, divided roughly equally across four segments: 22% are independent reps, 22% are bank brokers and trust officers, 23% are wirehouse and brokerage representatives, and 23% are life and property & casualty agents. Only 8% (30,024) are partners at fee-only financial advisory firms, although this segment has had the highest growth rate in AUM (18% annually over the last 12 years) of any channel. The final 2% are discount broker and mutual fund representatives. There are no significant flows, when measured by numbers of people, between these channels. However, when measured by AUM, there may be significant flows from captive to independent and fee-only channels, as those reps that do move may bring with them disproportionately larger assets.
The advisory business is highly competitive, particularly with respect to the larger and more profitable accounts. 400,000 advisors are competing for the business of approximately 117 million households (an average of 300 households per advisor). These households have average investable assets of $210,000, but the median investable assets are only $8,100. Advisors are competing for the business of only the top 10% or 20% of households, or between 10 and 30 million households, which works out to only 50 accounts per advisor.
We will provide additional coverage of the Tiburon conference in next week’s issue.
Roame’s characterization of the past year’s events as “noise,” with effects limited to the liquefaction of baby boomer retirement assets, understates the scope of the sub-prime crisis. Roame’s assessment will be correct if there are no further significant declines in housing prices, the equity markets have already discounted most of the bad news, and we undergo an eight month recession, similar to the prior two recessions. However, as we have noted in prior analyses, we believe the sub-prime crisis has the potential to be far more extensive than prior crises faced by the US markets, and we are not convinced future bad news (which Roame agrees is forthcoming) is fully discounted by the markets. Housing prices could decline by another 30% (see graph on this page) and evidence from other countries (see our article on this subject) suggests a two- or three-year recession. A prolonged recession, combined with current low interest rates and further declines in housing prices and equity markets, will affect more than just baby boomer retirement assets. Retirees at or near the de-accumulation phase will see an immediate impact, and Gen-x and Gen-y investors will suffer significant erosion in their retirement assets. This is more than just “noise.”