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May 23, 2015 at 09:00 PM
“If we were to go back in time 35 years, here we are in year 1980. How does a financial advisor’s life differ from the year 2015?” Moshe Milevsky, finance professor at the Schulich School of Business at York University, pondered in an interview with Investment Advisor.
There are three big differences that “really highlight the trends over the last 35 years,” he said.
First is that in 1980, interest rates were at “abnormally high levels,” between 15% and 20%. Over the next 35 years, they fall to almost zero.
“That’s an enormous change in that money doesn’t earn interest anymore. In fact, money is earning negative interest when you take into account inflation and taxes,” he said.
Second, the services advisors provide are different. Milevsky recalled that “35 years ago, investment advisors and money managers were stock pickers. […] Even mutual funds hadn’t become entrenched, let alone ETFs and managed portfolios.”
He continued, “Now an investment advisor doesn’t do stock picking. It’s almost futile. There’s this awareness of indexing that almost didn’t exist then.”
Indexing has led to a switch in the approach advisors take to managing portfolios. “We’ve gone from the default is active management to a default of passive management. That’s huge, completely transformative.”
The final big change over the past 35 years is in the nature of retirement. Three and a half decades ago, retirement was “a couple of years, a long vacation, and you get a pension from where you worked.” Now investors have to figure out how to make the money in a 401(k) or IRA last for a few decades.
“We’re living so much longer than we were in the 1980s. If you take a look at life expectancy and longevity, how long we’re living and how long we’re living in good health, the entire nature of pensions has been transformed.”
