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Week In Review

Execs Predict 'New World Order' For Financial Services

According to a survey by the IBM Institute for Business Value, 90% of financial markets executives and government officials believe the returns of the past are over, primarily due to radical restructuring of the financial markets.

Firms will have to adapt to new, lower margins, executives said, and specialize around the services that clients value, rather than providing a full range of in-house offerings.

Executives also foresee massive consolidation in investment banking, asset management and wealth management. Enhanced regulation will require transparency and commoditize previously high-margin activities, respondents said.

Financial services firms that facilitate market making will focus on a specific area, be it asset management, trading or technology. At the same time, the number of investment advisors will decrease. Only small boutiques, such as private equity firms and hedge funds, will focus on generating high returns from high-risk investments.

"The three trends-toward specialization, client orientation and improved efficiency -are triggering a restructuring wave on a greater scale than ever before, eroding margins and forcing all firms to reconsider their value propositions and their core business models," said Shanker Ramamurthy, global managing partner for banking and financial markets at IBM Global Business Services.

"The new industry will not only lack some of the great brand names of the past, but will also lack many of its past characteristics-from excessive risk taking, opacity and leverage, to massively high returns."

In the future, executives predicted, firms will continuously assess their risks and returns across each line of business and adjust their business mix accordingly. At the same time, these systems will also enable firms to refine client service through improved understanding of profitability by business line and product, as well as by individual client.

Executives also expect growth to remain sluggish through 2012. The survey was conducted among 2,754 participants, including 1,076 individual investors and 1,678 executives, to determine how financial markets should prepare for the future.

Advisers Less Confident in Retirement Income Skills

Thirty-six percent of financial advisers are less confident than they were a year ago in their ability to manage reitrees' assets-with most blaming the complexity of retirement income portfolios needing to both generate growth while guaranteeing income, GDC Research and Practical Perspectives found through a survey.

Seventy-seven percent have changed how they allocate assets in response to the market environment, and 14% have changed the way they build retirement income portfolios.

Respondents said that building retirement income portfolios is more complex, time consuming and must be customized, and will only become increasingly more challenging.

"While virtually all advisers agree that retirement portfolios must support dual goals of providing consistent income and long-term asset growth, there is little agreement on the best method to achieve these objectives," said Dennis Gallant, president of GDC Research and co-author of the report produced with Practical Perspectives, "Examining Best Practices in Constructing Retirement Income Portfolios."

Advisers feel tremendously responsible for their clients being able to "meet basic living expenses, such as shelter, food, energy and healthcare, [and this] has never been more of a challenge for advisers," said Howard Schneider, president of Practical Perspectives.

Advisers are split on whether to take a risk-adjusted total return approach to clients' portfolios (54%) or divide investments into various pools (46%). Most said they would like asset management firms to help them with the overall retirement income process rather than create additional solutions, which they are currently satisfied with.

A majority of advisers said they were not interested in the newer retirement income solutions and preferred familiar investment vehicles and trusted providers. Nonetheless, the advisers relied on a wide array of mutual fund and insurance companies, with only one firm, American Funds, used by at least 20% of the advisers surveyed.

401(k)s Under Heavy Fire

CBS' "Sixty Minutes" segment on 401(k)s, which slammed them as being mediocre offerings with hidden fees, is not the only shot being taken at the defined contribution model.

A Chicago Tribune column notes that Americans have lost approximately $600 billion in their retirement savings through 401(k) plans since the end of 2007, and are putting them to blame.

It's certain, then, that Congress will continue to scrutinize 401(k) plans, writes columnist Gail Marks Jarvis. "It seems 401(k) plans are being hauled out by Congress for a public stoning," she writes. "It's the catharsis many Americans need" due to what many say are "excessive fees and investment choices that are not always in their best interest."

As the Employee Benefit Research Institute notes, when the financial crisis began, 25% of Americans between the ages of 55 and 65 had 90% or more of their money in stock funds, and undoubtedly have suffered greatly, losing nearly half of their savings right on the eve of their retirement.

In addition, target-date funds have not held up well, particularly 2010 funds, which lost 26% of their value on average.