Rice Kachor report, retail and wholesale financial services, Mark Kachor

A recent report by Rice Kachor predicts that Australia’s financial services industry will swing convincingly to the retail side of the industry by 2010. Stuart Engel looks at the winners and losers as well as the trends reshaping the industry in the next decade.

A recent report by Rice Kachor predicts that Australia’s financial services industry will swing convincingly to the retail side of the industry by 2010. Stuart Engel looks at the winners and losers as well as the trends reshaping the industry in the next decade.

Demarcation between retail and wholesale in the financial services industry is be-coming less relevant as master trusts and superannuation choice eat into market share of traditional investment vehicles. However, in many ways, retail and whole-sale are still two separate industries.

And while the two may continue to battle for the hotly contested superannuation market over the next 20 years, it seems retail financial services may be getting the upper hand.

At least that is a key finding of a recent Rice Kachor Research paper looking at the shape of the financial services industry in 2010. The research predicts that almost two thirds (65 per cent) of the $1.2 trillion market in 2010 will come from retail sources. At the moment, little more than half (52 per cent) of $516 billion under management comes in via retail channels.

The shift from wholesale to retail will take a number of forms. For a start, the post retirement market made up of annuities and allocated pensions is completely dominated by retail products. And this is exactly where the most spectacular growth is expected to come from.

Rice Kachor director Mark Kachor says the combination of baby boomers retiring and the growth in superannuation balances due to the superannuation guarantee will cause an explosion in market activity in the post retirement market.

“There will be more people with more money moving into retirement,” he says.

The total post retirement market is expected to more than quadruple from its cur-rent level of $29 billion to $127 billion by 2010. Allocated pensions are expected to swell from $20 billion to $86 billion while annuities are predicted to rise from $9 billion currently to $41 billion in 2010.

And what is driving this change? One of the most striking attractions of the Aus-tralian financial services market for large overseas groups is what many refer to as the “mandated growth” of the Australian industry. This mandated growth is pri-marily the superannuation guarantee introduced by the Paul Keating.

Not only are Australians forced to put aside a set percentage of income to be in-vested by funds management groups, but the percentage continues to increase. And the more people put with fund managers before they retire, the more they have to put with fund managers once they retire in the form of post-retirement products.

Not only will dollars flood into the post retirement market, but superannuation cof-fers are sure to rise substantially. Most of the super growth is tipped to come via retail distribution channels.

In fact, Rice Kachor predicts that the retail superannuation market will surpass the wholesale superannuation market in funds under administration well before 2010, thanks mainly to growth in self managed super and master trusts. The research house predicts retail superannuation will be worth $516 billion compared to whole

sale’s $394 billion. At the moment, retail superannuation has $175 billion under management while wholesale super has $235 billion under management.

Kachor says the shift away from the wholesale superannuation market is primarily government policy driven. Public sector funds are expected to make up less than 10 per cent of the financial services market in 2010. They currently make up nearly 18 per cent of market.

“Partially this is due to the government shifting public servant employees from de-fined benefit to accumulation plans,” Kachor says.

“We also expect there to be a small decrease in overall membership as the govern-ment continues its steady stream of privatisations.”

Market share for corporate super funds is expected to go the same way as the pub-lic sector funds. Kachor attributes the fall to a combination of choice of funds su-perannuation legislation and the outsourcing of superannuation administration by companies.

“Companies are now realising administering superannuation is not core business and outsourcing to the experts. Choice legislation, when it materialises, will accel-erate the outsourcing of corporate funds,” he says.

So where will the billions go that once went to corporate or public sector funds? According to the Rice Kachor report, industry funds, master trusts and self man-aged funds will be the big winners from the coming decade in super.

Kachor says money will also flow into personal super accounts from corporate and public sector funds but there will also be movement out of personal super and into master trusts and self managed funds. The net effect, therefore, is minimal change in market share.

Kachor says employers and employees will both be looking for greater flexibility from superannuation. Responsibility for the quality of superannuation will gradu-ally transfer from employers to employees, he says.

Outside of the superannuation environment, the big news for industry observers will be the growing dominance of the unit trust structure. At the moment, unit trust investments makes up about 72 per cent of retail savings. In ten years time, it is expected to completely own the market with market share of 95 per cent, equating to nearly $200 billion under management.

The reason behind the dominance, according to Kachor, is consumer sovereignty. Advisers and investors simply prefer the tax structure of unit trusts.

But alongside this rapid growth sits yesterday’s products. Insurance bonds are ex-pected to be hit hard by their tax-deferred status shrinking from current levels of $11 billion to $5 billion. Much maligned products of the 1980s such as savings plans and whole of life products are expected to become virtually extinct. Savings plans will fall from $3.5 billion currently to $1.5 billion in 2010 while whole of life peroducts will drop from $11.2 billion to just under $4 billion.

Life insurance products are expected to grow at about the same rate of the overall financial services market and remain firmly in the hands of the retail market. Retail disability insurance is expected to nearly double to $2.6 billion, while group dis-ability (or salary continuance) is tipped to triple to $900 million.

Both retail and wholesale life and trauma cover is expected to more than triple to $10.5 billion in the case of retail and $1.7 billion in the case of group life.

The good news for advisers is that most of the product areas expected to boom over the next ten years are complex. This means they are not easily bought off the shelf by consumers. Instead they form part of a strategy which can only be pro-vided by financial advisers.

Kachor does expect direct channels to grow in the next decade, primarily in the unit trust arena, but says adviser directed channels will continue to dominate the industry.

Financial services 2010 — the winners and losers

Some products and services will clearly win market share over the next ten years at the expense of others. The following are the predictions of the winners and losers of the next ten years.

What’s hot 2000 ($billion) 2010 ($billion)

Allocated pensions and annuities 29 127

Self managed superannuation funds 59 203

Master trusts 32 132

What’s not

Insurance bonds 11 5

Savings plans 3.4 1.5

Corporate super funds 74 106

Public sector super funds 102 129