The risks posed to the asset management industry by low-cost tracker funds, and robo-advisers have been well documented, and while these risks should not be ignored, there’s an even larger threat to the industry emerging.
Unlike the rise of index funds and Robo-advisers, asset managers will not be able to diversify their way around this menace. Instead, managers will have to adjust to the new normal shrinking down to size or merging to stay alive.
The threat I’m talking about is peak savings.
Asset Managers Threatened As Robo Advisors Prowl
Asset Managers Threatened As Robo Advisors Prowl Photo by stevepb (Pixabay)
The US Has Passed Peak Savings
As the Wall Street Journal reported earlier this week, during the past two decades Americans have consistently contributed more than they have withdrawn from tax-deferred accounts. However, this trend ran out of steam in 2012 and throughout 2013 and 2014 the first wave of Boomers hit the magical age of 70.5 (according to a federal law introduced in 1986 savers who turned 70.5 have to start taking withdrawals from tax-deferred savings plans or face a penalty) and withdrew a hefty total of $25 billion during 2014 alone. The withdrawal figure for 2013 was $9 billion according to the Labor Department.
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Per the Wall Street Journal, Boomers have saved an estimated $10 trillion in various tax-deferred savings accounts, which may seem paltry considering current outflows but withdrawals are expected to accelerate over the next decade is more and more Boomers hit the magical age of 70.5. According to the federal law, Boomers must withdraw 3.5% of assets per annum at age 70.5 and 8% by age 90.
Assuming all Boomers take their required 3.5% per annum, that’s $350 billion every year the US asset management industry is losing. To put it another way, assuming an average fee of 1.5% of assets under management, the industry could lose as much as $5.25 billion per annum in sales revenue. Over the next two decades, the number of people age 70 or older is expected to double to 60 million. There is another problem is consider as well, with an estimated 75 million Boomers owning a total $10 trillion in various tax-deferred savings accounts the average saver has $133,000 saved for retirement, hardly enough to live in comfort with no other sources of income for more than a few years.
