Investing

This year the first of the baby boomers reach the age of 65, and the good news is that they are willing to pay for financial advice and seek financial products that will give them the security of a decent income for the entire 20 or so years of retirement.

As the baby boomers approach retirement, they’ll be wondering what to do with their money and how to organise their finances. This will create demand for financial products that cater to their needs, particularly around providing secure incomes throughout their natural lives. If we take an average retirement balance of $250,000, as per the estimate of Towers Watson’s Boal, and multiply it by 5.5 million boomers, that’s roughly $1.4 trillion in retirement assets.

Compare that with the $63 billion the pre-boomers held at the end of their working lives and you begin to see the scale of the shift between one generation and the next.

This presents a huge and expanding opportunity for businesses that provide financial services to the generation that is just now completing its working years – most obviously financial planners and wealth managers.

Good news for the big players

The giants in the $1.3 trillion wealth management industry are the big four banks and AMP (AMP), which, thanks to its massive planner network, is a more pure play on this theme.

The $14.6 billion merger of AMP and rival AXA Asia Pacific has resulted in a combined group with nearly 300 aligned and owned planners in Australia – or about 19 per cent of the total market. That puts it about 10 percentage points ahead of its nearest banking rival. In addition, there are about 6500 independent financial adviser planners offering AXA products.

Industry experts suggest new limits on commission payments to financial advisers and other regulatory requirements will favour the bigger players, which can achieve benefits of scale.

AMP estimates annual earnings growth could reach 10 per cent from 2013. But its fortunes are directly linked to the performance of the sharemarket, which remains anaemic. That, and the challenge of digesting AXA, are deterring investors – perhaps offering an opportunity to pick up the shares at cyclically low prices.

Challenger (CGF) is a company that sees the potential in selling the security of annuities to retirees who were rattled by the global financial crisis. The financial services company sold about $1 billion worth of the retirement income products last year, which supported a lift in first-half profit to a record $120 million over the six months to December 31.

The company has set itself a goal of increasing annuities sales by 20 per cent this year, supported by an advertising push. The stock continues to look decent value on a price-earnings ratio basis.

There’s money in them thar shovels

Remember, during the gold rush, the savvy didn’t go prospecting. Instead, they sold shovels. Similarly, investing in companies that provide services to the wealth-management industry could be a good move.

Since listing in late 2000, IRESS Market Technology (IRE) has become the primary supplier of financial software and trading systems to brokers in Australia. It also has operations in Canada, South Africa and Asia, where it’s looking to expand.

The company connects the funds management industry with the broker community through its trading system and share software. Its products are replicable – so competitors can enter the market – but have become so integral to the activities of share trading participants that large fund managers will refuse to deal with a broker who doesn’t use the system.

All that doesn’t come cheap for investors, though. The biggest challenge will be to buy the stock at a reasonable price.

Taking advice

Health care

The mature consumer