While large segments of the financial services industry focus on wealth management, a larger and more ominous number of financial reps will soon be practicing financial planning in an era of wealth destruction.
The odd thing is that both financial planners will work with the same fundamentals.
A Credit Suisse report on July 28, 2011, says that while there is only a 1% chance of a U.S. default, it could cause stock prices to fall by 30% over the next six to 12 months while raising the odds of a double-dip recession. The report also said any delay in negotiations (which is almost a certainty) that lasts for just three months could depress stock prices by as much as 15%, according to the bank’s analysts. The additional penalty for delay would cause a 1% decrease in the U.S. GDP monthly.
Even if default is avoided, the report says there is a 50% chance of a credit downgrade. That will raise interest rates on various purchases and act as another form of wealth transfer from individuals to banks, mortgage firms, and credit card companies.
The Net Effect of Wealth Destruction
The net effect is wealth destruction; no form of financial planning can fill the void. Wealth destruction changes the rules of retirement and work engagement. While retirement becomes an ever-moving target over the horizon, working for less changes the game’s name. Countries with AAA credit ratings (Canada, Australia, the UK, France, and Germany) will continue to hire top talent. At the same time, retirees fill in the vacant housing in Phoenix and Las Vegas as they take massive cuts in income. Inflation and more declines in housing equity will finish the job of destroying more assets.
The Pew Research Center this week released a study that shows the vast wealth gap between blacks and Latinos versus whites. The study found “lopsided wealth ratios” of white households were 20 times that of black households and 18 times that of Hispanic families. If it can be closed, this gap will become worse and unbridgeable for at least a generation. Historians have noted that substantial wealth gaps endanger and erode entire civilizations.
Finally, for financial advisors, there is no risk-adjusted program to restore lost wealth. If you did not have it in the first place due to home equity appreciation, saving and getting long-term returns (over 20 years or more) from your portfolio, you will not have it now.
