Chip Roame

The financial crisis decimated consumer wealth, and scandals such as J.P. Morgan’s “whale” and MF Global’s collapse have plagued the investment industry.  But the next challenge advisors and money managers face may be even worse – interest rates. 

Rising interest rates are the next big problem for the industry, according to Chip Roame, the managing principal of Tiburon Strategic Advisors, a consulting firm serving the financial industry.  Roame spoke on October 16 in San Francisco, at his firm’s semi-annual gathering of top executives from the financial industry.

Fixed-income funds have enjoyed a flood of money over the last couple of years.  But, as rates start to rise, Roame said that fund companies will suffer declining net-asset values (NAVs) in the short term. 

Over the longer term, consumers will see the purchasing power of their assets erode as inflation accompanies higher rates, Roame said.

“There will be a rebellion when people realize bonds weren’t as safe as they thought,” he said.

Rising rates will affect all corners of the industry, from consumers to institutional investors, according to Roame. Banks that are booking fixed-rate mortgages at 3% today will sustain losses once rates start to rise, he said, which would foreshadow a replay of the S&L crisis.  If those loans are sold off to FNMA or FHLMC, the burden will shift from banks to taxpayers.

Let’s look at some of the other trends that Roame sees as likely to have a lasting impact on financial advisors.

The erosion in consumer wealth

A hallmark of Roame’s analysis has been tracking changes in consumer wealth and their impact on advisors and financial institutions.

“Consumers are still poor, no matter what you measure,” Roame said.  “They have less money that they did in 2007.” 

Roame pegged the net decrease in consumer wealth over the last five years at $4 trillion.

Although investable assets have grown modestly over that timeframe – and now stand at approximately $30 trillion – the value of homes and small businesses are down – below their levels in 2007.

Those $30 trillion in assets are spread across 123 million households, meaning the average American has $200,000 in investable assets, Roame said.  But that is not a meaningful number.  A lot of assets are concentrated among the wealthiest families, so it’s more helpful to consider the median household, which has just $8,000 in investable assets.
“The average American household, whose wealth is driven by the value of their house, doesn’t feel their wealth is back,” Roame said. 

That’s not a great situation for the advisory industry, although advisors who know where to look may still find opportunities to take on previously unmanaged wealth. About two-thirds of assets are managed by an advisor today, according to Roame.

Houses represent 70% of the wealth of the typical family, according to Roame.  Meanwhile, small businesses – from restaurants to dry cleaners – represent approximately the same total value as homes, but only a “sliver” of Americans own one, he said.  “That is a good market for advisors to go after,” Roame said.

The number of millionaires, on the other hand, decreased by 6.5% over the last five years.  “The size of the market is down, if you are going after some version of high-net worth investors,” he said.

Roame also put in perspective the so-called great deleveraging by consumers that has taken place since the financial crisis. Consumer liabilities have decreased only slightly, he said, from $14 to $13.5 trillion.  Consumers in the aggregate are not over-leveraged, he said, since liabilities are only 20% of the value of assets.  The critical issue, according to Roame, is that debt is highly concentrated – and many of the most-indebted families face severe hardship.