It’s taken for granted that an expanding economic pie is good for everyone in the financial planning and investment businesses, but given the current election dichotomy between the haves- and the have-nots, it looks like many people in these businesses are going to be voting against their own self-interests.
Of course, it’s not supposed to be that way, but the wealth gap has some dire consequences for the wealth management and investment businesses simply because of the obvious: if you have little money, you cannot invest.
Here are some new dire statistics that show the future of wealth management is not going to be prosperous unless something drastic changes the wealth gap problem.
- Here are some specifics as noted in the publication, TruthOut.com:
- For every $100 owned by a middle-class household in 2001, that household had just $72 in 2013.
- A study by J.P. Morgan concluded that “the bottom 80% of households by income lack sufficient savings to cover the type of volatility observed in income and spending.”
- Downward class mobility is more common today. Nearly two-thirds of American families were considered middle class in 1970. Today it’s half or less.
- Just a year ago it was reported that 62 percent of Americans have less than $1,000 in savings. That number is now up to 69 percent.
- Numerous sources report that half or more of American families have virtually no savings, and would have to borrow money or sell possessions to cover an emergency expense.
- Three-fifths of Americans spend more than they earn on essential needs.
- Minorities suffer the most when it comes to essential spending needs. The typical black household has enough liquid savings to last only five days, compared to 30 days for a white household.
Bad News in a Low-Return Environment
Accompanying the wealth gap and the depressing financial situation noted above, investors are now in a prolonged low-return environment that may continue well into the near future. For the past century, the market has returned 9% per year propelled by earnings growth, and higher equity valuations. But since 2008, “real growth has slowed down on a trend basis,” according to Bloomberg news.
A UBS report said the market is suffering a “secular decline in earnings growth,” while the “implied discount factor” has dropped by about 4% in the U.S. and Europe. The same UBS report said three-quarters of the decline in the equity discount factor is being driven by the decline in the long-term risk free rate.
So what does all this mean to wealth managers?
For existing clients, it means lowering their investing return expectations. In terms of new clients, it means that wealthy people who don’t already have relationships will be harder to find. Adding new services and perspectives, including social activism and more transparency, may be a way to lure wealthy clients.
In any case, if there is no expansion in the upper middle class, it means the future of wealth management has to be re-evaluated. The rise of robo-advisors is one sign, accompanied by the emergence of more online, emerging investment managers.
The results of the upcoming election will re-shape the wealth management industry since only one candidate even addressed the issue of wealth disparity. This is an old problem. Even Henry Ford acknowledged that he needed to pay his workers more, so they could afford to buy his cars. Other early 20th century industrialists also recognized the benefits of offering pension plans and paying a living wage that were essential to the growth of the nation’s emerging consumer society, but over the evolution of the Republican Party, the idea of an expanding economy for all have been derailed. That accounts for some of its problems today.
However, the failure of the investment industry to publicly address this issue is another shortcoming. While all of this is a fluid situation, wealth managers should learn to cherish their existing clients since new ones will be much harder to discover and cultivate.