Morgan Stanley’s European Head of Research Product Paul Walsh
speaks to Betsy Graseck, Global Head of Banks and Diversified
Finance, and Bruce Hamilton, European Asset Managers Diversified
Financials Analyst, about the implications of increasing life
expectancy for the financial industry.
----- Transcript -----
Paul Walsh: Welcome to Thoughts on the Market.
I'm Paul Walsh, Morgan Stanley's European Head of Research
Product, and today we dig into a topic that really affects us
all. Retirement.
Life cycles are extending as people are living longer, healthier
lives. Coupled with government pension funds that are
increasingly under pressure, this means that consumers will need
to build much more robust investment plans to substitute for
salaries to carry them through a longer retirement.
And to understand more about the changing financial needs and
challenges of an aging population, I'm delighted to be joined by
my colleagues, Betsy Graseck, Global Head of Banks and
Diversified Finance, and Bruce Hamilton, our European Asset
Managers Diversified Financials Analyst.
It's Thursday, October the 24th at 3pm in London.
Betsy Graseck: And it's 10 am in New York.
Paul Walsh: Now Bruce, let's start with you. As
people live longer, they will likely spend more time in
retirement. Managing and ensuring retirement income over a longer
duration could have a significant impact on asset management.
What are the broad trends you're seeing in the industry right
now?
Bruce Hamilton: So, the asset management
industry in large part has focused on the accumulation phase of
investors journey. Whilst this remains critical as people build
assets for retirement – and we see growing allocations from
affluent investors to private markets as a trend which is likely
to be reinforced by the aging theme – there's a significant need
for decumulation products and solutions that can offer returns
and income over a prolonged retirement.
We see a lot of innovation as asset managers look to develop
products to meet this need.
Paul Walsh: So Betsy, people are living longer.
How ready are consumers for retirement? Are most retirement plans
or similar financial services ready to handle this challenge?
Betsy Graseck: Some are ready. But given how
rapidly the global population is aging, there is an increasing
need to provide solutions to individuals. Just to put a number on
it, the global population that is 65 years old or older in the
year 2000 was only 7 per cent. This is set to hit 10 per cent
next year in 2025 and 16 per cent in 2050. All groups need
service and advice – with the affluent group needing the most
increase in services especially if government pension funds come
under more pressure.
Paul Walsh: So, I think you set the scene really
well there, Betsy, and I guess the obvious question is, how can
wealth and financial planners best respond, do you think? Is it
by creating new products? Or do we need a much deeper
transformation?
Betsy Graseck: We see individuals today having a
wide range of retirement choices. What we feel they really need
here is personalized, customized advice, delivering solutions
that can address their unique needs. These span from affluent
individuals needing salary replacement strategies to
high-net-worth individuals looking for philanthropic and wealth
transfer strategies. A focus on integrated, personalized advice,
innovative products, and high-quality service that meets clients
as they wish to connect effectively will be critical.
Paul Walsh: It seems to me that it is – but is
this a positive for the financial services sector? And if so,
what do you think is the size of this revenue opportunity and
over what time period do you think?
Betsy Graseck: Well, the way we've looked at
this is across the global asset manager and global wealth manager
industry, as they will be the ones called upon to address these
needs. And we do see a roughly 30 per cent uplift in global
revenues by 2028, which equates to [$]400 billion in incremental
revenues across the global industry.
And that is driven by the expansion of individuals looking for
advice, in particular from the affluent group, as well as an
increase in fee-based products to address the income needs.
Paul Walsh: And there's some big numbers that
you've quoted there, Betsy. So let's dig into the financial
subsector and industries. What are the biggest untapped
opportunities there?
Betsy Graseck: Well, the number one is the
affluent customer base that we do see having the biggest need for
advice, relative to advice seeking today. And as that group,
reaches out and receives advice from wealth channels, that is one
major driver here. The second driver is the increase in fee-based
products to service the income replacement needs.
Paul Walsh: And what are the biggest challenges
do you think? Obviously, we've talked about the opportunity
there, but the biggest challenges to financial services that you
see along the way.
Betsy Graseck: Well, the way I think about this
is what is required to be a winner, and the winners need to be
able to integrate their entire organizations to deliver for
clients. And also leverage technology efficiently and effectively
to be able not only to deliver the highest quality service in the
way the client wants to be serviced; but also to optimize cost
structures, which then can get reinvested – you know, higher
pretext getting reinvested into the business.
The challenges are the opposite of institutions that remain
siloed and institutions that have, you know, maybe a tech
strategy that is not set to respond to the needs of this client
set.
Paul Walsh: Thanks for that, Betsy; and Bruce, I
just want to pivot back to you. Some asset managers are
partnering with insurance companies to offer guaranteed income
streams and wealth transfer solutions. What are some of the
successful models that you've seen so far?
Bruce Hamilton: So, asset managers are adopting
a range of approaches. Some have acquired insurance subsidiaries,
some have taken significant minority stakes, while others have
looked to deepen partnerships with insurance. Trade offs include
the degree of control versus the capital intensity that ownership
of insurance brings. So, we see more than one route, but a
continued push towards greater collaboration between asset
managers and insurers.
Given the potential for the asset managers to access stable,
permanent capital, that can then be deployed in a range of
investment strategies to offer diversified sources of income via
private or structured credit to support returns for the end
insurance clients.
Theoretically, the best place models to deliver retirement
solutions will have elements of wealth advice, plus a hybrid
asset management insurance product approach. Given the importance
of providing investors with regular and variable income, a
guaranteed minimum level of income, plus an ability to generate a
return to offer potential for legacy to pass to heirs.
Paul Walsh: And of course, Bruce, it's very
difficult to talk about product innovation, without bringing in
the topic of AI. As asset managers are working to create ever
more personalized retirement solutions as we've heard, how and to
what extent do you think they are leveraging AI?
Bruce Hamilton: So, our interviews with a range
of management players confirmed that many of the potential use
cases being worked on 12 months ago have now been put into
production. It's still early days, and so far, most use cases are
focused on areas that can drive efficiencies.
So, for example, in RFP report writing, synthesis of research,
and some of the middle and back-office processes for asset
managers. But over time, AI can clearly feed more bespoke client
service by wealth and asset managers with areas such as
customized investment proposals and financial planning offering
potential.
Paul Walsh: Fascinating topic. Betsy and Bruce,
thank you so much for taking the time to talk.
It's clear that increasing lifespans are reshaping the financials
sector by driving product innovation, influencing asset
allocation strategies, and, of course, creating new market
opportunities.
And to our listeners, thanks as always for taking the time to
listen in. If you enjoy Thoughts on the Market, please do leave
us a review wherever you listen to the show and share the podcast
with a friend or colleague today.
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