Financial services industry to benefit

As national discussion rages over Social Security reform, Wall Street is at odds on whether the creation of personal retirement accounts would be a boon to the securities industry or a non-event. There is also a theory that somehow Social Security privatization will help the financial services industry (which has contributed millions of dollars in campaign contributions to President Bush and the GOP). The theory has become more credible because it is no longer a secret that Bush's privatization plan does nothing to ensure the solvency of Social Security and is definitely going to hurt almost all Americans if they opt for personal retirement accounts. Then who is it going to benefit? Quick comes the answer that it must definitely benefit someone aligned with Bush. (Related article: Who does privatization help then?)

Debates over personal accounts have centered largely on the servicing costs they could represent. New research from TowerGroup explores the potential impact of personal accounts on the financial services industry -- and how costs such as account administration could best be minimized. Highlights of the research include:

1. The use of "life cycle" products -- where the risk profile and investment mix automatically adjust with an account holder's age -- is the most effective way to minimize costs associated with supporting personal accounts. Under this model, valuation could be done monthly, the need for transactions support is eliminated, and account updates could be sent annually along with the current Social Security statement. (Related article: Does privatization amount to gambling?)
2. Yet even assuming a relatively modest median servicing cost structure of $15 per account per year, TowerGroup projects the total servicing bill for personal accounts would exceed $1.5 billion annually (excluding asset management fees). A significant portion of those expenses would be spent on the technology infrastructure required to support record keeping for 100 million accounts.
3. The potential of adding $1 trillion to the US financial markets over the first six years personal accounts are implemented (and upward of $2 trillion over 10 years), would almost certainly impact the industry in a positive way. Yet, the specific benefits of personal accounts to the securities and investment industry are complicated. Contrary to some reports, TowerGroup expects that revenue from investment management fees associated with personal accounts would be relatively modest -- with actual management of these assets to be all but given away. (Related article: Fed governor opposes privatization plan due to debt concerns)

"This is not to say that there are limited revenue opportunities," said Little-Gill. "An overall increase in assets will drive aggregate management fees on the more than $35 trillion in worldwide managed assets. But the real benefits of personal accounts will be a more complex array of opportunities for trading, securities lending and the markets overall than has been discussed to date."

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Source: TowerGroup