Innovations in Retirement Solutions: The Role of Asset Managers and AI

Morgan Stanley’s European Head of Research Product Paul Walsh speaks to Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, European Asset Managers Diversified Financials Analyst, about the implications of increasing life expectancy for the financial industry.

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Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product, and today we dig into a topic that really affects us all. Retirement.

Life cycles are extending as people are living longer, healthier lives. Coupled with government pension funds that are increasingly under pressure, this means that consumers will need to build much more robust investment plans to substitute for salaries to carry them through a longer retirement.

And to understand more about the changing financial needs and challenges of an aging population, I'm delighted to be joined by my colleagues, Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, our European Asset Managers Diversified Financials Analyst.

It's Thursday, October the 24th at 3pm in London.

Betsy Graseck: And it's 10 am in New York.

Paul Walsh: Now Bruce, let's start with you. As people live longer, they will likely spend more time in retirement. Managing and ensuring retirement income over a longer duration could have a significant impact on asset management. What are the broad trends you're seeing in the industry right now?

Bruce Hamilton: So, the asset management industry in large part has focused on the accumulation phase of investors journey. Whilst this remains critical as people build assets for retirement – and we see growing allocations from affluent investors to private markets as a trend which is likely to be reinforced by the aging theme – there's a significant need for decumulation products and solutions that can offer returns and income over a prolonged retirement.

We see a lot of innovation as asset managers look to develop products to meet this need.

Paul Walsh: So Betsy, people are living longer. How ready are consumers for retirement? Are most retirement plans or similar financial services ready to handle this challenge?

Betsy Graseck: Some are ready. But given how rapidly the global population is aging, there is an increasing need to provide solutions to individuals. Just to put a number on it, the global population that is 65 years old or older in the year 2000 was only 7 per cent. This is set to hit 10 per cent next year in 2025 and 16 per cent in 2050. All groups need service and advice – with the affluent group needing the most increase in services especially if government pension funds come under more pressure.

Paul Walsh: So, I think you set the scene really well there, Betsy, and I guess the obvious question is, how can wealth and financial planners best respond, do you think? Is it by creating new products? Or do we need a much deeper transformation?

Betsy Graseck: We see individuals today having a wide range of retirement choices. What we feel they really need here is personalized, customized advice, delivering solutions that can address their unique needs. These span from affluent individuals needing salary replacement strategies to high-net-worth individuals looking for philanthropic and wealth transfer strategies. A focus on integrated, personalized advice, innovative products, and high-quality service that meets clients as they wish to connect effectively will be critical.

Paul Walsh: It seems to me that it is – but is this a positive for the financial services sector? And if so, what do you think is the size of this revenue opportunity and over what time period do you think?

Betsy Graseck: Well, the way we've looked at this is across the global asset manager and global wealth manager industry, as they will be the ones called upon to address these needs. And we do see a roughly 30 per cent uplift in global revenues by 2028, which equates to [$]400 billion in incremental revenues across the global industry.

And that is driven by the expansion of individuals looking for advice, in particular from the affluent group, as well as an increase in fee-based products to address the income needs.

Paul Walsh: And there's some big numbers that you've quoted there, Betsy. So let's dig into the financial subsector and industries. What are the biggest untapped opportunities there?

Betsy Graseck: Well, the number one is the affluent customer base that we do see having the biggest need for advice, relative to advice seeking today. And as that group, reaches out and receives advice from wealth channels, that is one major driver here. The second driver is the increase in fee-based products to service the income replacement needs.

Paul Walsh: And what are the biggest challenges do you think? Obviously, we've talked about the opportunity there, but the biggest challenges to financial services that you see along the way.

Betsy Graseck: Well, the way I think about this is what is required to be a winner, and the winners need to be able to integrate their entire organizations to deliver for clients. And also leverage technology efficiently and effectively to be able not only to deliver the highest quality service in the way the client wants to be serviced; but also to optimize cost structures, which then can get reinvested – you know, higher pretext getting reinvested into the business.

The challenges are the opposite of institutions that remain siloed and institutions that have, you know, maybe a tech strategy that is not set to respond to the needs of this client set.

Paul Walsh: Thanks for that, Betsy; and Bruce, I just want to pivot back to you. Some asset managers are partnering with insurance companies to offer guaranteed income streams and wealth transfer solutions. What are some of the successful models that you've seen so far?

Bruce Hamilton: So, asset managers are adopting a range of approaches. Some have acquired insurance subsidiaries, some have taken significant minority stakes, while others have looked to deepen partnerships with insurance. Trade offs include the degree of control versus the capital intensity that ownership of insurance brings. So, we see more than one route, but a continued push towards greater collaboration between asset managers and insurers.

Given the potential for the asset managers to access stable, permanent capital, that can then be deployed in a range of investment strategies to offer diversified sources of income via private or structured credit to support returns for the end insurance clients.

Theoretically, the best place models to deliver retirement solutions will have elements of wealth advice, plus a hybrid asset management insurance product approach. Given the importance of providing investors with regular and variable income, a guaranteed minimum level of income, plus an ability to generate a return to offer potential for legacy to pass to heirs.

Paul Walsh: And of course, Bruce, it's very difficult to talk about product innovation, without bringing in the topic of AI. As asset managers are working to create ever more personalized retirement solutions as we've heard, how and to what extent do you think they are leveraging AI?

Bruce Hamilton: So, our interviews with a range of management players confirmed that many of the potential use cases being worked on 12 months ago have now been put into production. It's still early days, and so far, most use cases are focused on areas that can drive efficiencies.

So, for example, in RFP report writing, synthesis of research, and some of the middle and back-office processes for asset managers. But over time, AI can clearly feed more bespoke client service by wealth and asset managers with areas such as customized investment proposals and financial planning offering potential.

Paul Walsh: Fascinating topic. Betsy and Bruce, thank you so much for taking the time to talk.

It's clear that increasing lifespans are reshaping the financials sector by driving product innovation, influencing asset allocation strategies, and, of course, creating new market opportunities.

And to our listeners, thanks as always for taking the time to listen in. If you enjoy Thoughts on the Market, please do leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.