The wealth of individuals, and by association the financial services industry, has changed dramatically over the past 40 years.
Government economic policy and the long journey south of interest rates – and inflation – have been a positive driver of investment returns.
Meanwhile, successive chancellors have slashed taxes to allow individuals and businesses to retain and invest more of their earnings.
In the late 1970s, free university education fostered social mobility and subsequently rewarded working lives with rising real wages, while equity markets produced generous bounty. A 14 per cent savings ratio reflected the aspirations of working-class people (like me) to ‘better themselves’ by sticking excess income into the stockmarket via a unit-linked savings plan.
That trend continued through the 1980s and beyond, with older generations buying their council houses, while a younger cohort – ‘Thatcher’s children’ – took conservative politician Norman Tebbit’s advice and ambitiously ‘got on their bikes’ to seek their fortunes. The motivation to improve one’s wealth was lauded and encouraged. Even the Labour party recognised the change, with baby-boomer Tony Blair’s centre-left project, New Labour, adapting its philosophy to reflect that zeitgeist.
Advice gap opening
Meanwhile, regulated financial advisers were largely indifferent between providing services for the relatively well-heeled, and those aspiring to be.
RDR had yet to create an advice gap. Today, a generation of clients is wealthier than their parents could have ever hoped to be, and that success can be attributed not only to successful career choices, but generous markets and financial advice that persuaded initially less-than-enthusiastic savers to make the best use of growing excess earnings.
Culminating in today’s pension freedoms, those of us who can afford it can access that wealth as we please to fund retirement spending beyond the constraints fixed by the state pension. This 40-year democratisation of wealth provides today’s advice industry with a rich vein from which to mine an ad valorem living, and this is reflected in the rise of the term ‘wealth manager’.
This generation of 20-somethings start careers later, struggle to get on the housing ladder and carry higher debt
However, those aged between 25 and 40 today have a tougher time of it. The FCA’s discussion paper, ‘Intergenerational Differences’, published earlier this year, suggested this generation of 20-somethings faces much greater difficulties in accumulating wealth. They start careers later, struggle to get on the housing ladder and carry higher debt.
Worse, it is estimated that, to achieve outcomes equivalent to the boomers’, today’s savers would need to achieve investment returns of almost 50 per cent per annum between the ages of 20 and 36, 7 per cent over the next 15 years, followed by 6 per cent until retirement. At age 67, they are likely to be still paying a mortgage, assuming they ever get to buy a house.
It is unsurprising that advisers may have little interest in those aspiring to be wealthy. These prospective clients have little capital and even less motivation to save, given historically low interest rate levels and the propensity to buy now and pay later, along with relatively low expected investment returns compared to the previous generation.
I believe the democratisation of wealth through effort and investment has been replaced by a despair that young people will ever get on the housing ladder or pay off student debt, or have a stable career path. The accommodating, centrist political landscape that prevailed as our industry grew wealthier is diverging as a consequence, and aspiration is being crushed into apathy and envy.
A ‘them and us’ polarisation of the populous is fertile ground for those seeking the political main stage. For example, the Labour Party has passed a motion promising to abolish private schools if it is elected. This would include redistributing the schools’ wealth and applying higher taxes equivalent to what wealthier parents could have spent on private education – whether their children would have been in the state system or not.
More pointedly for the wealth management industry, a Labour government would require that 10 per cent of shares in all companies with more than 250 employees – that’s around 7,000 businesses – should be owned by inclusive ownership funds. The dividends on those shares would be distributed among employees, but heaven forbid they should become wealthy as a result.
Raising the rate by stealth
The dividend would be capped at £500, while the balance would be paid to the government. Office for National Statistics data suggests almost 60 per cent of corporate turnover derives from large companies. According to Clifford Chance, this equates to £340bn in lost capital, with over £30bn from everyone’s pension funds – 90 per cent of the benefit would go to the government. This is equivalent to raising the UK corporation tax rate to 31 per cent by stealth.
There is a danger that the politics of envy is reasserting itself. Not simply penalising privilege, but confiscating wealth created by and for ordinary people who aspired to raise their standard of living. Young people are loath to spend money on financial advice, while many advisers have no interest in servicing their needs. Financial advice needs to return to satisfying the aspirational wider community, not merely servicing those already wealthy.
The wealth management industry should also recognise its fat cat profile makes it an easy target for politicians seeking to capture the votes of the younger generation.
Our industry should return to being both inspirational and aspirational, and increasing the wealth of the many rather than preserving the wealth of the few.
Graham Bentley is managing director of gbi2
You can follow him on Twitter @GrahamBentley