Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / How Falling Birth Rates Reshape the Investment Management Industry
Transcript
- Lucas: When you think about falling birth rates and what they mean for the economy, the first things that come to mind are usually labor shortages, housing demand, maybe pension systems. But there's a less obvious industry getting reshaped in real time right now: investment management. Luna: The business of managing other people's money. How does a shrinking younger generation change that? Lucas: At its core, the investment management industry has historically grown by gathering assets from a rising number of working-age savers. You have a demographic tailwind: more people in their prime earning years, contributing to 401s and IRAs, buying mutual funds and ETFs. That model depends on a growing pool of accumulators. Luna: And if birth rates keep falling, that pool starts to shrink. We're seeing it already in parts of Europe and East Asia. Lucas: Right. Japan is the canary in the coal mine. The Japanese investment trust industry has been flat in terms of number of unitholders for over a decade. The growth they've seen has come almost entirely from market appreciation, not new entrants. And that's a fragile kind of growth. Luna: Because market returns aren't guaranteed. If you're relying on price gains to keep your fee revenue growing, a prolonged bear market would be brutal. Lucas: Exactly. So asset managers are starting to pivot from a 'gather assets at all costs' model to one focused on extracting more value per client, particularly from older clients who are already in decumulation mode. The shift is from accumulation to income. Luna: That changes the product lineup. Instead of launching another growth-stock fund, firms are pushing managed payout funds, annuity-like products, and income-focused ETFs. Lucas: Vanguard is a great example. They famously built their empire on low-cost index funds for long-term accumulators. But in the last few years, they've been quietly retooling their advice arm, Vanguard Personal Advisor Services, to focus more on retirement income planning. They even launched a series of target-date funds that automatically shift into income-generating strategies as the investor ages. Luna: Target-date funds themselves are a demographic product. They're designed for the typical life cycle: save aggressively when young, taper risk as you near retirement. But what happens when the 'typical' life cycle is disrupted by longer lifespans and fewer children to support you? Lucas: That's the real challenge. A 65-year-old today might live another 25 or 30 years. And without a large younger generation to buy their assets or support social safety nets, they need their portfolios to last longer. So the old rule of thumb — '60% stocks, 40% bonds at retirement' — is being questioned. Some advisors are now advocating for higher equity allocations even in retirement, just to keep pace with longevity. Luna: But that introduces sequence of returns risk. If the market drops right when you start withdrawing, your portfolio can get destroyed. Lucas: Right. So we're seeing a push towards dynamic withdrawal strategies and products that hedge against that risk. BlackRock's LifePath Paycheck fund, for example, integrates a deferred income annuity inside a target-date structure. It's explicitly designed for a demographic that's retiring with less certainty about how long they'll need to fund. Luna: That's a product that barely existed ten years ago. Now it's one of the fastest-growing segments in defined contribution plans. Lucas: And it's not just products. The whole fee structure is under pressure. In a growing population, you could charge 1% of assets under management and grow your revenue as the market rose and new clients joined. In a stagnant or shrinking client base, that same fee structure means declining real revenue unless you raise fees — which is politically difficult — or cut costs. Luna: So we're seeing consolidation. Big firms acquire smaller ones to gain scale and strip out costs. The number of mutual fund complexes in the US has fallen from over 700 in the late 1990s to around 400 today. Lucas: That trend will accelerate. But there's another angle: the passive indexing revolution itself might be a victim of demographic change. The whole idea of 'buy and hold the market' works when there's a steady inflow of new capital from younger generations. If that inflow slows, the market becomes more dependent on price appreciation driven by corporate earnings and multiple expansion — which are not guaranteed. Luna: And if passive investors start to withdraw in retirement at the same time, you could get a liquidity mismatch. Everyone selling, no one buying. Lucas: That's the 'demographic headwind for passive' thesis. Some researchers argue that the Baby Boomer retirement wave will depress equity valuations for years as they liquidate their 401s. But it's not that simple, because those assets are being passed down to Gen X and Millennials — though with fewer children per retiree, the per-capita inheritance might be larger. Luna: So it's not a simple negative. The concentration of wealth in fewer hands could actually support asset prices, even if the number of investors declines. Lucas: That's the counterargument. But it assumes the inheritors actually invest in equities rather than spending it on housing or consumption. And there's evidence that younger generations have a higher propensity to consume out of wealth, partly because of higher living costs. Luna: So asset managers are caught between two forces: a shrinking pool of new clients, and a massive wave of wealth transfer that could go either way. Lucas: And they have to adapt their entire business model. Some are moving into alternative assets like private equity and real estate, which offer higher fees and potentially higher returns. Others are expanding into financial planning and advice, trying to capture a larger share of the client's wallet. BlackRock bought Aperio, a direct indexing firm, to offer more customized tax management for wealthy retirees. Luna: Direct indexing is interesting because it lets you harvest tax losses even in a low-return environment. That's particularly valuable for older investors who are realizing capital gains. Lucas: Right. And it's a way to differentiate from the pure passive players. If everyone's using the same Vanguard Total Market fund, there's no reason to pay for active management. But if you can offer tax alpha and personalization, you can justify a higher fee. Luna: So the investment management industry's response to falling birth rates is essentially a three-pronged strategy: create products for decumulation, shift fee structures to be less asset-based, and consolidate for scale. Lucas: I'd add a fourth: global diversification. Firms that can gather assets in younger demographics — India, parts of Africa, Latin America — can offset stagnation in developed markets. The biggest asset managers are already doing that. BlackRock gets over 40% of its revenue from outside the US now. Luna: But that exposes them to currency risk, regulatory risk, and the challenge of serving clients with very different wealth levels. Lucas: It does. But it's better than being stuck in a shrinking market. Look at Japan: the largest asset manager there, Nomura Asset Management, has been trying to expand into Asia precisely because the domestic client base is aging and not growing. Luna: One thing I find fascinating is how this demographic shift is affecting the advice profession itself. Financial advisors are an aging workforce — the average age is around 50. Who's going to replace them? Lucas: That's a huge issue. Fewer young people entering the profession means fewer advisors to serve a growing retiree population. Some firms are turning to robo-advisors and AI to fill the gap, but for complex retirement income planning, many clients still want a human. Luna: If walking through the economy with us has made something click, I'll just say: listener support is what keeps this show ad-free and independent. We don't have a big network behind us — it's just kind of a labor of love. Lucas: Yeah, and we want to keep it that way. If you've gotten value from these episodes, especially the deep dives, you can support us at buy me a coffee dot com slash fexingo. No pressure, but it helps us keep digging into these angles. Luna: Alright. So back to the investment management industry — I want to talk about one more thing: the role of defined benefit pensions in a low-fertility world. Lucas: That's a good one. Traditional pensions are dying out in the private sector, but public pension plans are still huge. And they face a double demographic whammy: fewer active workers contributing, and more retirees drawing benefits. Luna: That's essentially a Ponzi scheme that works only if the population is growing. Once it stops, the math breaks. Lucas: Exactly. So pension funds are being forced to take on more risk to meet their return assumptions, which pushes them into alternative assets, private credit, infrastructure. That in turn reshapes the asset management industry because these are high-fee products that require specialized expertise. Luna: And that creates opportunities for firms like Apollo and Blackstone, which have built massive credit platforms. Lucas: Right. But it also increases systemic risk. If everyone's chasing yield in illiquid assets, a liquidity crisis could be severe. The Bank of England's intervention in the UK gilt market in 2022 was a warning: pension funds using liability-driven investment strategies got caught in a margin call spiral. Luna: So the demographic shift is not just changing products and fees — it's changing the risk profile of the entire financial system. Lucas: I think that's the big takeaway. Investment management is often seen as a relatively stable, predictable industry. But underneath, it's being fundamentally rewired by the simple fact that there aren't as many young people coming behind us. The firms that adapt will survive; the ones that stick to the old model will struggle. Luna: And the winners might look very different from the BlackRocks and Vanguards of today. Lucas: Exactly. Maybe they're firms that master income products, or that excel at advice, or that dominate in emerging markets. The landscape is shifting, and it's worth watching closely.