2019 Financial Services Outlook
DEC. 20, 2018
As the year end approaches, many clients wonder what the financial industry forecast looks like for 2019. Nationwide leaders came together to give their professional viewpoint and weigh in on what consumers and advisors will likely face in the coming year.
- Economic view
- Capital Markets view
- Retirement Plans view
- Advisory Firm view
- Life & Annuity view
- RIA & Fee-Based Advisor view
- Financial Services Sales view
- David Berson, Chief EconomistReal GDP growth in 2019 is expected to slow from this year’s approximate 3.0 percent pace, but remain above-trend at around 2.5 percent. Higher interest rates from Fed tightening and rising inflation, lessening of the positive impacts of tax cuts and increased federal government spending, and slower growth abroad should combine to cool economic activity.
- Short-term rates are projected to rise modestly further in 2019 as the Fed continues to move toward rate normalization. We expect four 25-basis point tightening moves next year (bringing the federal funds rate up to a range of 3.25-3.50 percent by year-end), although financial markets have priced-in only one move. While the yield curve is expected to flatten further in 2019, we do not expect it to invert – suggesting that the odds of a recession in 2019 or 2020 are low.
- The unemployment rate is projected to drop further during 2019 to under 3.5 percent (levels not seen since the early 1950s), while wage gains should continue to accelerate as labor market slack declines. Inflation is projected to edge higher in 2019 as labor and product markets tighten still more – moving it further above the Fed’s 2.0 percent long-term goal.
- Home sales activity has probably peaked and should edge lower in 2019, held down by continued supply shortages and reduced affordability (due to rising prices and mortgage rates). House price gains are projected to decelerate modestly, although remaining at an above-average pace as demand exceeds supply.
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Capital Markets view
Mark Hackett, Chief of Investment Research
- The economic and fundamental backdrop in the U.S. continues to be supportive of continued equity returns. We are in the maturation phase of the economic cycle, but there is no expiration date on this phase, and this phase has historically been positive for stocks.
- Given Nationwide Economics team’s outlook for 2.5% growth in 2019 (better than the 2.1% average during this expansion) and the consensus estimate for S&P 500 earnings growth of nearly 10% on 5% sales growth, a positive year for equities is expected. Bear markets are rare in periods with strong economic and earnings growth.Valuations have been reset this year, with the forward P/E for the S&P 500 falling from 18.5x in January to 15.5x currently. This is lower than the average from the past 20 years at 15.8. If earnings grow at 10%, the S&P can deliver a double-digit return (including 2% dividend yield) while valuations contract.
- Tailwinds for earnings growth include improving consumer spending on rising wages and job growth, healthy capital spending and an accommodative regulatory environment. Headwinds include a strong dollar, and cost pressures from rising labor, transportation and commodity costs. Managements’ should remain aggressive share repurchases, which will likely hit a record high in 2019.
- Given the position in the cycle, it is not unhealthy or unusual to continue to see higher interest rates. The Fed is guiding to four additional hikes through the end of 2019, with long-term rates expected to rise at roughly half the pace of the Fed Funds rate, per Nationwide Economics. Investment-grade spreads remain tight, while high-yield spreads have expanded in recent weeks. Given the strong fundamental environment, spreads should remain reasonably tight, advantaging credit-sensitive and short-duration investments relative to long-term Treasuries.
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Retirement Plans view
John Carter, President of Nationwide Retirement Plans
- Equity market volatility and rising interest rates are causing participants to wonder what the impacts will be to their 401(k) portfolios. As a result, we expect to see greater call volume from participants as volatility spikes, and continued interest around managed account solutions.
- Health care is one of the largest expenses in retirement, and wealth and health are inextricably tied. Yet, health savings accounts (HSAs) are a fairly untapped retirement saving strategy today, even though HSAs offer participants a triple-tax advantage: contributions are made pre-tax, savings grow tax deferred, and withdrawals are tax free when used to pay for medical expenses. Nationwide expects greater interest in offering a combined retirement planning program that encourages savings in an HSA alongside a 401(k), 457, or 403(b), allowing participants to have a fully integrated solution to manage current health care expenses, plan for future health care saving and save for retirement.
- Technology is shaping Americans’ expectations across all industries. Whether it’s accessibility of information, or assistance and support, people expect immediate results and easy interactions. The retirement plans industry is no different. Thus, retirement plan providers, like Nationwide, are consistently investing in new technology and developing new tools and capabilities to improve the experiences of our participants, plan sponsors, and intermediary partners.
- With the national media’s emphasis on cybersecurity, we anticipate growing interest in and concern from both plan sponsors and participants on the security of participant data. We foresee greater discussions with plan sponsors on cybersecurity during the RFP process, and more emphasis placed on this critical need and the scale of an organization’s entire IT operations.
- Advisors will better serve their clients well by broadening their preferred provider consideration set and having the health / wealth discussions. With defined contribution/401k dabblers exiting the business as demand for specialization grows, advisors should look to providers that offer a robust package of tools beyond the product offering to serve the overall financial needs of participants. There is an opportunity in 2019 to engage clients in health/wealth conversations and rely on providers’ resources, such as those offered through Nationwide Retirement Institute, for valuable content and solutions to make the conversations easy and productive.
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Advisory Firm view
Ron Ransom, SVP of Strategic Partnerships
- Asset flows within focus firms and the industry continue toward advisory programs and away from brokerage assets. This underscores the trend of carrier firms/product providers strategically partnering with distribution firms to align and develop appropriate products. As the landscape evolves, Key Account relationship managers need to strategically engage distribution firms and help solve for both current and future needs.
- Firms are grappling with the aging advisor population. They are working to address succession planning and the transition of books of business. Both carrier and distribution firms are addressing go-to-market strategies to better serve the needs of the next generation of financial advisors.
- Advisors are still flocking to independent and RIA models. The importance of technology based solutions and platform providers is growing quickly, leading firms to focus resources on both understanding the landscape and how to strategically engage.
- In the ninth year of a bull market, Firms and Advisors are trying to anticipate what’s next and how to best prepare for a low-expected return environment. Advisors have an increased responsibility and opportunity to discuss the value of annuities that provide protected income, principal guarantees and important legacy- planning features. Firms need to educate advisors and ensure the product offering is aligned to enable advisors to have these discussions.
- Firms will see continued Fund rationalization, but with DOL in the rear-view mirror, they’re determining what platform evolution looks like now. In a world of reduced shelf space, carriers need to focus on creating differentiated product, providing value-add solutions and delivering top-tier service.
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Life & Annuity view
Eric Henderson, SVP of Life & Annuity Business
- As equity markets continue to be volatile, consumers – especially those in- or near-retirement – will need to evaluate the protection features of their portfolio. Advisors have an increased responsibility and opportunity to discuss the value of annuities that provide protected income, principal guarantees and important legacy-planning features.
- Increasing interest rates will allow consumers to enjoy higher guaranteed income and crediting rates on annuities, but will also increase the potential downside risk of bonds, which can impact the conservative portion of their overall portfolio. More advisors are beginning to evaluate fixed indexed annuities as an alternative solution for their customers’ portfolios based on their downside protection and upside potential.
- Long-term care (LTC) remains a significant unmet need of consumers, particularly given challenges with stand-alone LTC carriers who grossly underpriced the market years ago. More life insurance carriers will enter this market, offering creative long-term care solutions as an alternative to the traditional stand-alone products, to address this real and growing need.
- With projected continued market volatility and a potential market correction, expect consumers and advisors to have renewed interest in guarantees, driving sales of indexed universal life (IUL), whole life, and other guaranteed products like no- lapse guarantee universal life. As interest rates continue to rise, carriers will most likely respond with improved pricing, giving greater value to consumers in their life insurance solutions.
- Most major carriers who have introduced accelerated underwriting programs are now seeing this feature quickly move from innovation to table stakes. The carrier who makes underwriting a seamless process with no advisor decision making and an improved experience for the consumer will separate themselves from the pack and win market share.
RIA & Fee-Based Advisor view
Craig Hawley, Head of Nationwide Advisory Solutions
- Volatility returns to the forefront, interest rates continue to rise and tax-reform 2.0 kicks in—reshaping the way RIAs and fee-based advisors serve different generations of clients. Rising rates can be a double-edged sword for aging clients; turbulent markets bring fear—but also bring buying opportunities—for younger clients; tax reform drives more affluent clients of all ages to seek guided advice.
- The most successful RIAs and fee-based advisors continue to differentiate—and create their competitive edge—through specialization and holistic financial planning. As fee compression continues to create greater pressure, asset management becomes increasingly commoditized, and markets increasingly turbulent, you can’t win on performance alone. Become the quarterback of your clients’ financial life, offering full-service solutions from risk management to tax-advantaged investing to insurance planning, for their long-term success—as well as your own.
- As the Retirement Income Challenges grow — while the safety net continues to come under threat — RIAs and fee-based advisors have new and innovative approaches to meet clients’ urgent retirement income needs. As 10,000 Baby Boomers per day look to retire in 2019, outliving retirement income is a top concern. RIAs and fee-based advisors can provide a more durable solution, when part of the portfolio is protected with a guaranteed income floor, so the rest can be invested more aggressively to help fund a retirement that could last 25 to 30 years—or more.
- To enhance the value proposition for clients, increase profitability and drive greater growth, RIAs and fee-based advisors are proactively shifting fee models. As clients expect and demand greater transparency, and fee compression continues to push costs lower, themost successful RIAs and fee-based advisors move beyond the basic fee for AUM model, with fees for specific services, retainers, hourly fees and flat fees. A more dynamic approach to structuring fees helps you profitably serve diverse clients, across different generations and different levels of net worth, offer more customized and holistic planning, and use new categories of products.
- RIAs and fee-based advisors continue to harness the benefits of technology and stay on the right side of the “AI Divide.” Technology has become more efficient, integrated and intuitive, helping create new categories of products and services that never existed, expanding access in ways that were never expected, providing greater transparency and simplicity. Top performing RIAs and fee-based advisors continue to combine high tech with the human touch tobuild a more efficient and more scalable practice—and create a competitive edge.
Financial Services Sales view
Tina Ambrozy, SVP of NF Sales & Distribution
- Advisors are challenged to keep up in the rapidly accelerating pace of change environment. New technology and investor expectations to have access to information on demand and on their terms is challenging the norms and mindsets of advisors and distribution firms to focus on the client experience and simplify the process.
- The landscape for personal ownership of retirement preparedness has never been more clear. Individuals are recognizing the need for planning and saving for their own retirement with the elimination of defined benefit plans and concerns over the stability of Social Security. There are trillions of dollars at play and the environment is ripe for disruption. As such, new distribution channels and markets are being developed and evolved more rapidly than ever, providing investors choice in how they want to interact with investment entities.
- With the long running bull market, not enough advisors are talking with their clients about diversifying their portfolios and locking in the gains they have earned in their accounts. With increased market volatility, investors have a long history of fleeing from the market to areas of safety, only to sell out at the bottom of the market – the worst time to do so. This is the time for advisors to engage in conversations with their clients and implement strategies to manage volatility and threats of a recession.
- With market volatility, various types of investments will be impacted differently. Some investment vehicles are built to perform well in a bull market, while others are created to manage the threats of losses in a bull market. Today’s climate calls for advisors to evaluate their clients’ portfolios to ensure they are positioned well to weather the unusual market environment we are experiencing.
- As investors move from accumulation of retirement savings to distribution for income, there is a great deal of misinformation and complexity in how make their savings stretch to provide the income stream needed to sustain their desired lifestyle in retirement. Insurance based products are an important part of a client’s portfolio as nothing provides the peace of mind and guarantees that insurance products do. Annuities are the only solution that can provide clients with a guaranteed income stream that is critical in covering the non-discretionary expenses (mortgage, utilities, groceries, etc.) they will incur in retirement.
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