Summary:
In this episode, Benjamin Reed-Hurwitz, Associate Director of EMEA Research at ISS MI, leads a conversation with Goshka Folda, Global Head of Research at ISS MI, diving into the latest Household Balance Sheet (HBS) Report. Ben and Goshka dissect the evolving power dynamics, growth avenues, specialized strategies, and overarching trends, which, while focused on the Canadian wealth management landscape, provide transferable insights applicable to other geographies.
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For a deeper dive into the insights and analysis behind ISS Mi’s Household Balance Sheet, visit https://page.issmarketintelligence.com/household-balance-sheet
Transcript:
Benjamin: Welcome to MI Talk, the podcast series brought to you by ISS Market Intelligence. I’m Benjamin Reed-Hurwitz, your host and head of EMEA research at ISS Market Intelligence. The focus of our discussions on MI talk is the global Retail financial Services marketplace and its many subsectors, including asset management, wealth management, life insurance, banking and fintech. For more than three decades, the ISS Market Intelligence team has been a passionate student of this business.
Our specialty here is to explore the proverbial second day story and peek beyond the industry headlines, and to do so with the assistance of industry experts and thought leaders. We create monthly episodes, so if you enjoyed this episode of MI talk, remember to subscribe to our podcast on your preferred platform. Today I am joined by none other than Goshka Folda ISS MI’s Global Head of Research.
Goshka has been my mentor for nearly a decade now, and I can say there are few people with as much passion for the business as her. And speaking of passion, today we are in fact talking about Goshka’s baby, a report she first started working on in 1992 and has spearheaded for over two decades in that report is the Canadian Household Balance Sheet, a report I have also had the pleasure of contributing to.
This report has been the go to source for Canadian household savings in investment dynamics since 1993. It provides detailed forecasts in the source from which much of Canada’s wealth market has built their corporate strategies. So welcome Goshka.
Goshka: Thank you very much, Ben. And, I like listening, but today I have a different job. So thank you for stepping in and, leading this podcast.
Benjamin: It is. It is my pleasure. Now, let’s get to the report. Now, Goshka, you know that I’m a lover of mystery novels, especially if Baker Street is involved in this report poses and investigates one big question regarding Canada’s wealth management landscape, a question that I expect is equally applicable across much of Europe. And that question is where is the growth gone when it comes to financial household wealth?
Goshka: Well, that is a great question. And just like you, I am lover, of, Sherlock Holmes and, mysteries. And so this is a good one. The House balance sheet report in many ways really helps us, peek under the layers and try to understand why things are happening and what we think is going to happen in the future from the perspective of the household wealth.
I think that we have to realize, that we’ve just wrapped up a decade of, quite rapid growth, all the way to 2022 with minor disruptions towards the end of 2018. And then once again, of course, a micro, a big, but short lived that, at the beginning of the pandemic, households, in Canada and around the world enjoyed tremendous growth thanks to the market, progress.
We think that this is not going to continue for the decade ahead. Of course, right now, and especially in the last couple of years, we went through some, significant, downdraft. But, maybe those are behind us, but the volatility and the market growth is not going to save everybody’s beans as it has in the past.
But I think that even more importantly, there are secular trends that are really, acting as headwinds, from the perspective of household growth of their, their financial wallets. One big one is, the, the kind of the debt overhang and the macroeconomic situation. Inflation is still here. You heard yesterday, the Bank of Canada still, saying not convinced that inflation has been squeezed back, into the models.
So, households right now are still challenged by that kind of double whammy of inflation, rising costs of living, especially in large cities, but really across the country. And to top that off, of course, the, the, the very considerable mountain of debt whose cost of servicing is so much higher, today than it was a few years ago.
If you then add to that so market that inflation overall macroeconomic situation even though the job job market remains pretty strong in Canada. I think that the other really big one is this idea that demographically, if you think about the wealth management, asset management business or all investment businesses, really enjoyed a tremendous run of the past 30 years, as long as we’ve been observing this business.
It has been a march with the baby boomer generation. Now that the last of the baby boomers are going to hit 65 in the next, five, five and a half years, and that means that that generation that’s the most productive generation, in in that 55 through 64 years old, where households are both most motivated to save for retirement and also possibly most capable to do so, is going to actually atrophy.
Both on the baby boomer side and, there will just simply not be enough Gen-X households entering that phase to make up for the shortfall of the baby boomers moving into the payout, say so when you add it all together. I think we’re expecting, a slowdown from the past decade through the end of 2022, 7.4%.
Again, Mark is a big contributor down to, a kegger of 6.2% for the the decade ahead. So, you can, you are a strategist yourself. So you know what that will mean for businesses. A lot more competition, a lot more take away game.
Benjamin: Now, I think you, in fact, sort of refer to this, this environment that’s being created is leading to a big squeeze.I was wondering if you could talk about what the impact of this big squeeze is going to be on the wealth management value chain. And secondly, since I know you speak to so many executives across the industry, how well do you think corporate corporate strategy amongst wealth management firms will reflect this potential upcoming squeeze?
Goshka: Well, it’s it’s, it’s a thank you for raising this term, the big squeeze. Actually, we put it there at the beginning of the report. And it’s really about the households being squeezed. But but of course, to the extent that the, the asset wealth management, industries and banking life are there to service Canadian households, of course, that’s the squeeze, that’s the knock on effect on the business. So I think that this is going to have that, you know, that mysterious term that I just used for those of you who have not heard us speak on this topic for the past 25 years, the takeaway game, so we expect competition for dollars, addressable market is not going to grow as fast.
Competition is going to be very, very sturdy, is going to intensify. We’ve seen this intensification already for the past 20 years. But again, with the markets, giving, as much as they have in the past, you know, really since 2009, the second quarter, such an a tremendous inflation of all financial investment assets on the on the Canadian household balance sheet, of course, that provided a lot of opportunity.
Right now, I think that opportunity will have to be one. And I think one of the first signs of that, and we’re beginning to see this and the coin is dropping, is the fact that the inflows into investments in particular are just not very, very strong. We are seeing a lot of dollars go towards deposits and kind of liquidity and capturing that high interest rate, through some GIA season.
GIAs, terms, certificates in the US also very, very popular. But right now the wealth management industry itself is just not on the receiving end of these very robust flows. And as a matter of fact, we believe that these flows from the peak of the pandemic years, of course, influenced also by the, the, the, you know, lack of ability to spend some, some discretionary moneys, and deferred or unrealized consumption, those inflows into the balance sheet per year were 300 billion plus.
Now, the next five years, we’re looking at 170 billion or some. So that’s it’s not quite half, but it is actually a very significant, down, downtrend. Are firms really strategically understanding this is happening? I think that they are feeling this on the front lines. I think that a lot of players that I speak with, they are feeling this on the front lines because the sales environment and I know when you watch, Europe so, so closely is just the sales intensity just not there.
Not for everyone but certainly in general, it’s just not there could be some little improvements. But overall the sales environment for asset management, wealth management is pretty, pretty tough. So is that dawning on that idea of the big squeeze and slower growth? I think I am starting to see a lot more like large financial, institutions, and, and asset managers, wealth managers starting to understand that.
Are they fully ready for, for what to do with that strategically? I think that piece is uneven, but I’m going to without picking on anyone, I’m going to say that because, that’s my reflection, that sometimes it all depends on how businesses are looking at their own business and where they’re they have the attention on their long term strategic game plan.
And, and at different times, different organizations are leaning that way. And at other times they have day to day activities that kind of consume their, their attention. But I think it’s starting to, to, to, to dawn on people. And I think that we are asked more and more about, you know, the, the new balance of power and what will happen going forward.
Benjamin: Perfect and I couldn’t agree more when when talking about the 2023 sales environment, particularly for products like investment funds, I think 2023 was one of the hardest years sort of on record, in in terms of challenge, in terms of just finding the appetite, among sort of the broader distribution channel. In the report obviously, you have a lot of great analogies.
We’ve already talked about the big squeeze. There’s another analogy I particularly loved in the report. Of course, you know, I’m very much a student of history, and this is the idea, sort of moving between being a hunter gatherer, versus a farmer. I was just wondering if you could shed a little more light on, on what was meant by this analogy and how it sort of applies to what you’ve already described.
Goshka: Yes Ben so am I, anybody, who knows me knows that I’m also a great lover of history. And I have been, not really in preparation for this report, but usually we do read certain books. Me and, the, the main editors, the architects of the report. And, of course, it’s it’s, really the entire, ISS MI Canada and Mumbai teams are working on the, on this report and, and, and so it’s a really a group effort and, the farming analogy and I have to credit, our colleague
Will Stevenson who came up with it, and really, the idea is, that if you want to grow your business and, markets are not going to inflate your asset base, which they have, to the benefit of many asset managers, wealth managers in the past. Again, we’re talking 15 years. If you can’t count on that market growth to save your beans, or if you cannot count on the fact that there is this massive generation of investors who are high promoters needed to save more for retirement because it’s imminent and they’re in their peak earning years, and hopefully they’ll dispose of some of the debt.
So their ability to save and propensity to save and ability to save are there. Then if you can’t count on those two factors, that means that you have to figure out a growth formula that is somewhat different from the one that you might have been using for the past 30 or 40 years. That is that is difficult, let me tell you.
And we actually have a series that we’re contemplating for the US and for North America and hopefully globally, called A Path to Growth for the asset management business because it used to be so easy, and now it’s, it’s a thought process. You have to give it some thought. Why do we talk about farming versus hunting?
So, you know, the the previous, decades have all been about capturing the new dollar that’s coming into the balance sheet, trying to lock down the addressable market. But I think right now, what you, as you know, any any firm has to do is start by looking at their existing customers and saying, okay, job one, I have to keep them.
Job two, I have to hopefully dig deeper into their share of wallet and and into their wallet and grab a bigger wallet share. So how do you do that? So that’s really that I think the subtle balance, from when societies went from being hunters gatherers and settled in the spot they had to figure out how to, you know, how to establish crops, how to rotate fields, you know, was it one and 1 or 1 of three?
I was just reading about the medieval system anyway, so I think this is where, where we think that this has profound, implications for the sales and marketing, arms of, asset managers, wealth managers, banking, etc.. So and also on the distribution front line, a lot of distribution capacity has been kind of created ostensibly to win more business.
Now, I think that pivot has to say, how do I retain this business and how do I, mine the existing clients? So I think that’s that’s something, that we talk about quite a lot. And the other comment that I would make here is this whole idea of, that the acquisition cost of the, of the next client.
I think that in an environment that everything is inflating and also the capital is looking for a good spot to land and it’s quite available. I think that it places, a much, lower hurdle on the, you know, kind of, the, the demands for immediate, profitability for payback. Because the expectation is, yes, the, the cost of acquisition of a customer is high, but you are going to be able to outgrow your yourself out of that particular, particular, kind of cost.
Cause drag. Now, as we look towards the future, it’s not clear that there is going to be enough addressable market, enough new clients coming into the system to actually or there will be a lot of new clients, millennials and Gen X for sure, but it’ll take some time before they actually have a lot of investment dollars.
So I think that this is something that that companies have to think about. That does mean ultimately some form of margin compression. That means that also capital is going to be a lot more careful. And this is where we’re beginning to see that strategic repositioning by some of our largest clients, where they’re starting to say, okay, it’s not growth at all costs, it’s actually growth at a reasonable price.
I’m going to use that investment strategy, Moniker, to to describe what I mean. It’s growth but profitable growth. This is not something that has been very much spoken about until I would say the last, a couple of years. So, so that’s those are, I think, are the kind of how we got from the hunting to the, to the farming and how we try to think through the implications for wealth management business.
Benjamin: Great. I mean, when I read it, I, I had thoughts along similar lines and, and specifically I started to think about, okay, if, if I’m, if I’m one of these wealth management firms and I’m operating in this environment you’ve discussed, do I have to wonder if I’m sort of the, the farm owner, the crop, the labor or the machine?
And what I’m getting at here is, do you have any thoughts on the trends in terms of specialization, partnerships and firms trying to be everything to everyone? How do you think that dynamics going to play out?
Goshka: Ben that is such a such a great and astute observation that, you know, are you going to be the crop that’s eaten by others or are you going to be the, the, the farmer or the leader of, kind of mining?
Or or, kind of gathering the crops of your hard work? I think that is going to be a question that a lot of firms strategically have to think about, because clearly there are some firms and let’s say, let’s, think about the the kind of the distribution side of the business, the large wire houses in the US, some of the largest, financial advisory firms, in the US and Canada, in the UK, you know, they, they unfortunately, when you were very, very large and the same goes for the trillion plus asset managers, you do have, more limited ability to kind of restrict yourself to a very narrow lane
because you, you know, you, you have a lot of clients who have a lot of assets and you have to be able to service a lot of, a lot of needs and, and cultivate the relationships with the clients. So there’s a bit less optionality, actually, if you can imagine, for the largest firms that have to figure out how to do almost everything quite well, but those firms as well have the largest, capacity to invest in techno logy, which can be super helpful and really deploy kind of, state of the art, you know, productization, delivery, advice, range of advice, etc., etc..
Now when you I think but if you are in that other spot, that’s kind of not quite at the mega mega size level, you have to really try to figure out, where am I at scale? What am I good at? Is what I’m good at actually valuable to my clients or my partners, my distribution partners or my clients?
And you have to figure out how to do this. And in some cases, you might go back to your maybe even original roots and ethos and say, let’s take an asset manager. You know, there is there is a value chain that starts at where the brain trust of investment managers, portfolio managers put together a strategy when there is, you know, huge team around that that, that that that helps them kind of populate the strategy with the right, portfolio positions.
And then you have you know, there are many other steps and then there is the productization team. So converting that into funds or unit trusts, or uses whatever it might be. And then there is marketing and sales and distribution. Then there come comes the advise giving or other forms of distribution and the end client.
So you have to start thinking that for some organization they’ll say, well, I think my ideas in terms of investment management are powerful. I know what my story and my ethos there is. I’ve been pretty determined. Maybe I have a very niche specialty, which is really, really good. And we see asset managers around the world succeeding with very, very narrowly.
But maybe my productization is not at scale. And this is where you raise the point of strategic partnerships or even shipping out or outsourcing certain capabilities. As we move forward, if the margin compresses for asset management or wealth management down the road, and that’s already, wealth management and distribution might be already not as rich a margin as for asset managers.
Then you, you, you you can think about the idea that maybe I can’t do it all alone. Maybe I should ship some things out and I think we’re going to see more and more interesting partnerships. Of course, some very high profile partnerships. You know, it’s also trial and error. You know, we’ve we’ve seen some kind of, come and go and, you know, with, even with retail brands like Apple.
But I think that we’re very early on, on that idea, because we do have some very powerful partnerships. For example, in Canada, RBC, which is the largest financial institution and has the, the, also the largest, investment advisor full-service brokerage, network in Canada, has opted to ship much of its, ETF manufacturing to Blackrock and Blackrock is our strategic partner of, of of RBC in in in many aspects, of course, RBC retains some ETF manufacturing capability, but that’s a recognition I think that’s that type of a partnership. So incognition of where am I at scale where I’m we’re at. I might not get to scale fast enough. And maybe a partner that I could secure can deliver that at a fraction of the cost.
So those are the things that I think you have to be. I’d say maybe and the way that that I talk about it and with our use upstream as well, I actually use the word that I really like, it’s a lot more deliberate strategy rather than kind of, okay, let’s just go with the flow.
Benjamin: Yeah, I really I really kind of, like, like that answer to the question. I think it makes a lot of sense. I think you’re right. I think there’s there’s the big firms that have more of a ability to potentially, potentially do it all. You have those specialized boutiques who likely know what they’re good at. And I think a big question is what’s going to happen in the middle there.
Now, we’ve we’ve covered a lot that’s really focused on the wealth management industry on its own. But we know the business doesn’t operate in a silo. And no matter no matter how hard it actually tries, a key trend sort of explored, I know in the report and and by your team in particular, expands beyond wealth management. And, and that trend is, is the creation of personalized products and experiences. How do you see this personalization playing out in the wealth management space?
Goshka: Such a great question, Ben. And you know what? Maybe this is a question that that I think this is where, hopefully I’m not being too megalomaniac about this. I think this is where we excel at taking these big ideas and big trends that are explored in the report.
And then we get together in the rooms with our client, of the report and really try to play it out. What does it mean for wealth management? What does it mean for asset management? What does it mean for banking? Life insurance? What does it mean for the government? What does it mean for the regulators? I mean, it goes on and on.
And that’s really the power of the household balance sheet report, is that ability to take these big ideas and say, and what does that mean for you, as in a discussion in an interactive, session. And we’ve just done a range, I’ve just done, a slew of, of those. I’ve mentioned to you. So this personalization trend is one of such trends that, of course, all of us, are consumers of highly personalized solutions these days.
Of course, technology has become so, so, prevalent in our lives. And, you know, when I, when I get, Alexa, to wake me up in the morning and she says, you know, good morning. Goshka I mean, we have a great day. I love it. I know it’s really silly, but we are just conditioned from everything around us, to to feel more and more like we are unique.
We are us and everything has to cater to our needs and preferences. Probably not really the case, but when it comes to financial services in general, but in particular, I think as and wealth management, that was not really the the original formula. Right. The economics of the business is actually heavily centered. You know, when you think about asset management, it’s all about investment funds.
It’s pooled products. This is, you know, the you’re gaining access to, the world’s, you know, best asset managers or, and portfolio managers, through this pooling of resources and accessing through a product that’s a one size fits all. Well, we believe and we have been saying this for a better part of two years, that we are a very early on in this, form of the personalization and the asset management space in particular.
But I see no other option, but at least at some, level, introducing more and more and more personalized and customizable solutions. Now, whether investors or their advisors choose to customize fully or they just choose to use, you know, a product or a model that’s already available from the asset manager, or choose a service from a distributor that’s kind of readily, readily available.
That remains to be seen, but at least this idea that that that you have to start figuring out how you can unbundle some of these products. So you permit or you open the door, to, investors actually saying, okay, I want for my portfolio to reflect more of these ESG ideas. I want for it to reflect more of diversity and inclusion, and, and equitable, ideas or I want to, you know, there are some very particular considerations that, that I, I might want to include in my portfolio.
They can still start from a model offered by the asset manager, but either by themselves or, with the help of an advisor, they’re going to arrive somewhere quite different. And they will feel more like this is a, a product that’s, that’s addressing a target market of one that has long, really, I think big implications for the economics of the business.
I think both on the distribution side, I advise giving side because suddenly advisors will have to most advisors do a lot of personalization, personalized services. But of course, not for every single client in their book because some of the clients are too small, if you will, for them to actually spend enough time to deeply personalize that an investment solution for them, but even more so that that has a huge knock on effect.
It’s really working to unbundle the solution at the asset manager level. And I think that’s a really, really, probably the most impactful idea that we have to discuss with our clients and to say, listen, you’ve productized everything. You are at scale, but maybe you have to now unbundle everything. And this is not different than other industries. We’ve seen this form of unbundling, especially as technology startups came in, you know, the streaming came in and what happened to the cable companies, etc., etc..
So, you know, there’s this there’s this, I guess, chaos theory destruction cycle that, you know, first builds of these, these very, very bundled value chains, and then it starts, a kind of, unbundling the length and then going after, after individual links. So I think that that’s, you know, the final comment I’ll make on this band and, service.
I’m going on about it. I’m pretty passionate about it is you, as you well know. There are some key questions that, you know, I over the years, I’m, I’m a pretty I think sometimes I like to overcomplicate things, but I’ve come we’ve come down to some pretty basic questions as an, as a player. The wealth management as a management business is, who is your client?
How are they changing? Who is your distribution client or distribution partner? Who is your end client, and how are they changing? And do you have a value narrative that resonates with the evolving needs and preferences? Of these clients? So that question number one, who’s your client? Number two, is your economic model fit for the 2020s? If you think that the modeling is coming, capital is possibly more expensive.
The flows are not going to be as abundant as in the past. Is your economic model fit for this kind of squeezed environment? That’s number two and number three. And that raises the point that you made about, strategic partnerships. Who is your competitor and maybe who is your not just your enemy, but your frenemy. Maybe in some key cases it’s not going to be about competition, but competition.
And I think that we have to if you are a business that that wants a long term strategic growth, you have to really address those three questions. So if you start there, they’re pretty simple. But if you start there and we have some good data to support all of those ideas, I think that you can plot a very successful future because for every disruption going to be many firms, incumbents, some incumbents, some some newcomers, from other areas altogether, maybe from the retail world.
And then in some cases, some of the start ups are that we’ve seen that, collectively that competitive field is likely to evolve, and you have to almost have a 360 degree version of the competitive landscape. So you’re prepared for all these, comers, because ultimately you do want to be the farmer, and you also want to be the one that is conquering new fields and adding to your repertoire and maybe pivoting to areas, that are right now forested.
But you would like to reclaim as, as, as or a potential oil, potential farmland. So, I think that’s how we think about the business. And, you know, I could go on and on, but I will stop right here, Ben.
Benjamin: That’s what I love about, the household balance sheet report. It starts with the basics and the basic questions, but then the the team in Canada, follows the threads further and helps people understand sort of what it’s going to mean to them. And it really covers it from a vast array of viewpoints. And with that, we will wrap up today’s podcast.
Thank you, Goshka, for these fascinating insights on on the Canadian household balance sheet. I encourage our listeners to come back to join us in the coming months, as we have a number of exciting episodes on the burner, including a closer look at the UK wealth management market. Our podcast features special guests both external and internal to ISS Market Intelligence.
As always, stay curious and I encourage you to reach out to myself or the broader team with ideas about specific topics or industry guests you would like us to feature. Thank you, on behalf of ISS Market Intelligence.
About the series:
MI Talk, a podcast series brought to you by ISS Market Intelligence (MI), delivers global coverage of developments in the asset management, wealth management, insurance, and distribution industries. Each episode features ISS MI’s experts in conversation about topical issues, trends, and developments that are shaping the market intelligence landscape, specifically, and global financial services industry more broadly. Financial services professionals focused on funds, annuities, insurance, mortgages, and related areas will find MI Talk particularly helpful in staying abreast of what’s of import across the industry.