The silver dollar

investment viewpoints

10 May 2019

Johan Utterman

Senior Portfolio Manager

An aging population has the potential to drive a proliferation of sustainable investment opportunities in the financials sector.

The median age of the global population is rising, in part, as a result of people living for longer. Seniors are in fact now the fastest-growing demographic in the world. A demographic shift such as this stands to be incredibly disruptive to society as a whole, especially considering the share of capital this older generation accounts for.

Seniors and members of the baby boomer generation control an increasingly significant proportion of global buying power. Figures show this demographic own almost three-quarters of wealth in developed countries. Over 50s in the US, for example, are estimated to control 70% of disposable income¹. The global ‘silver economy’ is predicted to amount to $15 trillion by 2020.

At the same time, there have been changes to the provision of pension plans. The responsibility for retirement provision has in many countries moved from the state and employer to individual pension schemes, meaning that people are more responsible for their own financial planning than before.

All this amounts to a rapidly growing, increasingly wealthy generation, which is facing a potential shortfall of professional financial advice at a time when it is needed the most. The changes to retirement provision in particular have been accompanied by greater choice and complexity, emphasizing the need for face-to-face financial advice.

As people are required to take greater responsibility for their financial planning, demand for related financial services can naturally be expected to grow. The wealth management market in the UK alone is today worth an estimated £2.2 trillion, but there is still a shortage of financial advisers capable of providing this face-to-face financial advice. Twenty years ago, there were as many as 200,000 UK financial advisers but, today, there are no more than 30,000. This creates a meaningful investment opportunity when it comes to a number of the existing wealth managers in the UK.

This demographic shift is also likely to increase the demand for life insurance products. Developing markets in particular have witnessed significant growth in life insurance industry profits, which were up 12 to 15% in 2017, according to McKinsey. China is now nearly as large as the United States in terms of absolute profit in the life insurance industry, following several years of strong growth. Demand for life insurance products appears healthy and this ageing population trend which is unfolding has the potential to support further growth in the future.

Financial services companies can help people save toward retirement and, once they have achieved financial security in a post-work environment, they may need further advice on other issues such as inheritance tax planning. Developing a financial plan for later life is a multi-faceted affair which can require numerous inputs over a lengthy period of time.

The financials sector presents a number of opportunities in connection with this demographic shift. In the UK, for example, we believe wealth managers such as St James’ Place² are in a good position to benefit from such trends. The wealth manager noted in its most recent annual results that 65% of UK personal wealth is in the hands of individuals aged 55 or more. This presents an opportunity for financial advisers to build long-term client relationships and manage a significant intergenerational wealth transfer.

Wealth management and life insurance companies in particular represent an attractive investment proposition since they are well placed to meet the demands of the older generation. In turn, that should stand them in good stead to generate economic value above their cost of capital and thereby grow their equity market valuation over time.

sources.

¹ Statistics Paper Series No 2, April 2013. US Census Bureau.

² Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

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