THE MONEY ISSUEFebruary | 2013

v.4

CONTENT______________________________________________________________________

1. REFRAMING THE AMERICAN DREAM

2. THE INHERITANCE PROBLEM

3. ENTREPRENEURIAL IDEALS CHANGED SUCCESS

4. A LEASE ON LIFE: RENTED LIFESTYLES

5. TURNING TO THE TANGIBLE

6. A CALL FOR FINANCIAL EDUCATION

7. HIGHLY EDUCATED, HIGHLY IN DEBT

REFRAMING THE AMERICAN DREAM

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SITUATIONTo many, the traditional “American Dream” was achieved when you earned a college degree, got a good job, bought a house, and had smiling kids with your happy spouse. While 70% of Americans still believe the concept of the “American Dream” is alive and well, the elements of this dream have evolved, signi!cantly.

WHAT WE’RE SEEING• The possibility of achieving the American Dream is heavily

in"uenced by one’s personal sense of !nancial security, which continues to decline. People living paycheck to paycheck continue to outnumber those who are comfortable with their !nances. This has "ip-"opped over the past 15 years, as more households were !nancially secure in the 1990s. Due to crashing housing prices, accumulated wealth has taken a hit. 23% of those with a mortgage say they are in severe trouble as the costs to pay o# the mortgage greatly exceed what they’d make for selling the property.

WHAT WE’RE SEEING• Consumers still lack the understanding of how to best manage their !nances. Only 30% have ever prepared a comprehensive !nancial plan (covering their savings, investment, retirement, and insurance needs) or even worked with a !nancial professional for assistance.

• Gone are the days of !nding a job and working your way up the corporate ladder until your able to retire with a pension. Today, job changing is all too common; 91% of Millennials expect to stay at a job for less than 3 years, resulting in roughly 15 to 20 jobs over the course of a lifetime. The likelihood of someone experiencing a job loss, reduction in pay/bene!ts, or a !nancial emergency where they couldn’t meet their savings needs has increased three times the rate seen in the 1970s.

• Due to the e#ects of the economic recession and the increasing trend of focusing on one’s career, the age at which society is getting married and having kids is being pushed back.

IMPLICATIONSWith the evolution of this dream continuously changing, it appears that we’re turning the focus on us. There is no longer one dream that everyone is striving to obtain — we’re making our own dreams, treading our own paths. Has our competitive nature declined or are we just adapting to the economy? Luxury brands are also adapting to the economic shift and !nancial insecurity by partnering with “everyday lifestyle” companies to provide high fashion at lower prices. Neiman Marcus partnered with Target to create a limited collection with high-end designers previously seen as aspirational to many consumers, including Diane von Furstenberg, Derek Lam, Rodarte and Tory Burch, to o#er products with approachable prices, allowing consumers to reward themselves without breaking the bank.

THE INHERITANCE PROBLEM

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SITUATIONAs the postwar generation lives longer, spending much of their savings along the way, the meaning and reality of inheritance has changed drastically. Today, statements like “Someday all this will be yours” seem outdated and almost foreign as people’s attitudes toward inheritance have shifted signi!cantly.

WHAT WE’RE SEEING1. EXHAUSTED SAVINGSWith many medical gains, the 85-and-over age bracket is the fastest growing segment of the U.S. population today. But, with low interest rates, volatile !nancial markets and rising costs for health and long-term care, !nding the money to cover those years is getting increasingly more di$cult. Indeed, many boomers are now covering the cost of their parents’ living and healthcare needs and supporting them !nancially. According to a study from Northwestern Mutual Life Insurance Co., one in three adults 60+ said they didn’t feel prepared !nancially to live to age 85, and almost one in two said the same for reaching age 95.

WHAT WE’RE SEEING2. SHIFTING ATTITUDESEven for individuals with over $250,000 in investable assets, preserving an inheritance for children or grandchildren is becoming a low-priority concern. According to a Merrill Lynch survey released in 2012, only 41% reported the inheritance issue as a concern, down from 54% in 2009.

3. PHILANTHROPYEven the most a%uent are reprioritizing what they leave behind. Unlike permanent philanthropic foundations such as the Rockefeller Foundation established in 1913, all the money given to the Gates Foundation is to be spent within 50 years of death of the last surviving founder (i.e., Mr. or Mrs. Gates).

IMPLICATIONSThe US Trust 2012 Insights on Wealth and Worth survey found that of Boomers, 31% don’t think it’s important to leave a !nancial inheritance, 57% believe each generation should earn its own wealth, and 54% believe it’s more important to invest in children’s success while they are growing up. But nearly 40% of those between ages 13 and 22 expect to receive an inheritance, according to a recent TD Ameritrade study. Amid the widening philosophy around succession and wealth, what could brands do to bridge the expectation gap and ease the generational tension?

ENTREPRENEURIAL IDEALS CHANGED SUCCESS

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SITUATIONGoogle, Facebook, and Instagram are just some of the poster children for what successful start-ups should aim to be. We all know that not every guy in his dorm room will be able to create the next Facebook, and these success stories are becoming less and less attainable. Only 10% of all new products succeed, and the odds of succeeding in your !rst start-up is a meager 12%. Small business and the “entrepreneurial American spirit” have been heralded as the magic potion to save America’s job crisis, which isn’t necessarily the case. “There’s this idea that we can somehow rely on entrepreneurship to get us out of the job crisis,” said Scott Shane, an economics professor at Case Western Reserve University. “That’s getting harder and harder, considering there are fewer and fewer of them, and they’re each employing fewer people.” Combine that reality with the high risk and rates of failure, and it seems like an extremely risky and unattractive path. However, early entrepreneurial rates continue to surge (jumping nearly 60% from 2010 to 2011 alone) with success rates increasing from one’s !rst failure to the next endeavor (jumping to 20% from 10%) — meaning that even if they fail the !rst time, they keep on trying until they succeed. Has everyone suddenly lost their business sense, or is something else driving this?

WHAT WE’RE SEEINGObviously, “succeeding” in business is turning a pro!t and making it through the !rst few tumultuous years, but the concept of “success” has taken on a bigger meaning. Yes, making money is important, but money has become the means to an end, not the be all, end all that people strive for.

WHAT WE’RE SEEING

IMPLICATIONSMany brands have recognized start-ups as an extremely valuable and strategic target market, but the e#ects of this cultural shift and way of thinking has much bigger implications for brands that go beyond messaging and advertising — and into business strategy. As more and more people are embracing and honing their entrepreneurial skills and having the urge to “go out and do it better myself” and “make my hobby into my career,” corporations and businesses have the opportunity to capitalize on this way of thinking and motivation among its employees. Imagine if IBM started living the “start-up life,” using iterative processes, giving everyone the opportunity to come up with the next big idea, and not thinking within the con!nes of their MBA program’s 4Ps. If the idea of success has transcended simply making money and getting ahead in corporate America, then corporate America needs to embrace this shift to win the global innovation game.

People are willing to work “leaner,” employing fewer and fewer people and taking on more responsibilities themselves. Large, fancy o$ces and conference rooms have been replaced by coworking spaces and Skype sessions.

Full-time employees have been replaced by part-time employees that work nights and weekends because they see this as a hobby they don’t mind doing, not a “job” in the typical sense. And more and more people are willing to take the old adage of “living the !rst few years the way most people won’t, so that you can live the rest of your life the way most people can’t” with a grain of salt, because they know that their likelihood of really making it big and becoming wealthy o# of their business is slim to none. Their real goal is to simply be able to do what they want to do with the rest of their lives — whether it be designing typefaces, building the next-generation online dating site, or building the better mousetrap.

A LEASE ON LIFE:RENTED LIFESTYLES

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SITUATIONWe can all agree that since the economic downturn, things just have not been the same. When the market tanks, people stop spending and the economy slows even more. We will optimize (and maximize), as best as possible, our own !nancial situation to ensure a place at the table of our own consumer culture. Enter “transumerism.” The concept is that today’s consumers still want the experience of conspicuous consumption, but do not want to pay for it (at least, not all at once); they will rent it, share it or own a fraction of it. Companies such as Zipcar, Net"ix, NetJets, Spotify, YBUY and Club Sportiva are all examples of “transumerism” — they allow the consumer the experience without the major investment.

WHAT WE’RE SEEINGAs a society, we are moving from “He who dies with the most stu# wins” to “The age of traditional spending is dead.” The consumer is placing a higher value on the experiences, even experiences that would ordinarily be out of reach in the traditional economy.

WHAT WE’RE SEEINGHome ownership is declining and renting is on the rise. Money not spent on mortgages, maintenance, and investment is freed up for other uses. Transumer options have thus exploded in the past few years. Net"ix, Zipcar, and Pandora led the change to subscribe to a service that would remove the need for the purchase of movies, cars, and music respectively. Where the transumer trend is headed is in the continuation of o#ering content, but also providing otherwise unattainable experiences to a greater set of consumers — ones who would have ordinarily never been customers. Uber has done this for idle limos, just as NetJets has enabled wealthy consumers and corporations (not just corporations) an option for fractional jet ownership.

IMPLICATIONSTransumers are consumers driven by experiences rather than the desire for large amounts of material possessions; you can see how this is important to the economy. There are three themes that arise from transumerism:1. ACCESSIBILITY enhances a brand’s ability to engage a new customer that would have never been in the consideration set. Due to the nature of transumerism, a luxury design house such as Prada can provide a full-cost handbag to impoverished students for $50 a week rather than $3000 all at once.2. TRIAL, in this case, means the ability for the transumer to experiment with new products, services, and experiences. Certain things haven’t changed — trial is still top of the purchase funnel, and the more a company can expand the base of potential users, the higher the potential is for sales.

3. PREDICTABILITY matters most to the transumer: instead of owning a car which might break down or requires unscheduled maintenance, Zipcar enables them to know that every month, a certain user fee is deducted from their account and all car use is planned and incremental ($7.95 per hour is less of a commitment than a car payment of $400 a month).

TURNING TO THE TANGIBLE

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SITUATIONCash, once the norm for purchases, is slowly becoming defunct. The production of bills has fallen to its lowest level in modern history and cash accounts for only 2.5% of the total value of economic activity in America. That iconic green paper is becoming less and less a part of our !nancial lives. Plastic, autodeductions, and online bill pay are now the standard. We don’t see the money we earn or even a check representing our earnings. Instead, it is digitally transferred into our accounts. Our conception of money is based less and less on the tangible and more on the intangible numbers on a screen. We watch as the stock market plunges hundreds of points, the volatile numbers shifting on the ticker. The increasing intangibility of money coupled with the volatility of the equally intangible markets has encouraged many Americans to question the true value of these immaterial assets and seek out physical assets they can touch and feel.

WHAT WE’RE SEEINGGold is so in demand now it is being sold for $1,700 an ounce, nearly four times the price in 2005. The exceedingly high demand has made gold storage a lucrative industry, with new storage banks opening up beyond the traditional New York, Zurich, and London centers in far-"ung locales such as Delaware and Singapore. Demand for other precious metals like silver and palladium has also skyrocketed in the past year. Even unconventional assets like celebrity autographs have seen a 147% increase in price as more people consider collectibles. Farmland and timberland have become popular investments for high net worth investors, who are buying up land domestically in Nebraska, Arkansas, and Washington.

WHAT WE’RE SEEINGFarmland and timberland have become popular investments for high net worth investors, who are buying up land domestically in Nebraska, Arkansas, and Washington.

IMPLICATIONSThis trend has obvious implications for !nancial institutions, who can work to provide more advice, support, and services around these hard assets. However, the more critical question is how this trend might have a greater impact beyond !nancial services. How will other brands respond to the growing consumer interest in tangible goods and experiences? What will brands like Ticketmaster and Expedia, who have built their business online providing intangible services, do to accommodate this new cultural shift? Match.com, the online dating site, has already responded to this new demand by o#ering o%ine dating events where people can mingle in person. Ebay, similarly, has started opening up brick and mortar shops. How will other brands capitalize on the new trend without diluting their online image?

A CALL FOR FINANCIAL EDUCATION

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SITUATIONWe learn a lot in school — from algebra to biology to U.S. history — but many U.S. students leave the public education system without a clue how to balance a check book, pay taxes, or how a credit card works. Given the current !nancial literacy level and the continued complexities of !nancial products, that may soon change.

WHAT WE’RE SEEINGUntil the !nancial crisis, no curriculum existed to educate the next generation about !nancial tools. We were focused on !xing the problem, not understanding why we were in such a mess in the !rst place. The market has evolved to !ll the need — non-pro!ts, our government, and !nancial service brands have taken note, and a thought-provoking intersection of the role of the public and private sectors is emerging. Brands such as Mint and Simple are pioneering the creation of easily understood !nancial programs to enable consumers to take control of their !nancial world without being overwhelmed by big bank jargon and processes. But big banks aren’t sitting idle; as recently as this month, Wells Fargo announced an “Adopt-a-School” pilot program seeking to teach Philadelphia students !nancial literacy through hands-on educational experiences. “The goal of this program is to demonstrate Wells Fargo’s commitment to education and demonstrate our approach to supporting schools and low-income communities,” said Aldustus Jordan, the foundation’s vice president of community a#airs. This e#ort is not the !rst of its kind.

WHAT WE’RE SEEINGA nonpro!t, Jump$tart, is dedicated to improving the !nancial literacy of prekindergarten through college-age youth by providing advocacy, research, standards, and educational resources. They have partnered with state school systems, as well as private !nancial institutions including American Express and Bank of America, to create programs that promote the teaching of personal !nance in PreK–12 classrooms. The e#ectiveness of these types of programs to improve !nancial literacy is still debated, but there is a strong case for improved !nancial behavior.

IMPLICATIONSMany of the problems from the 2008 !nancial collapse exposed our nation’s lack of knowledge about home loans, taxes, and savings. Financial education needs to be prescriptive, preventative, developmental, and delivered on a massive scale. The gap in our education system provides an opportunity for !nancial brands, whose public image is tarnished, to take action and enable the next generation to be more !nancially prepared.

HIGHLY EDUCATED,HIGHLY IN DEBT

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SITUATIONThe last few years have proven just what a mess students may be facing when it comes to !nancing (and repaying) university costs. Similar to the mortgage crisis, discrimination, predatory lending, "u#y advertising, and poor repayment modeling have left many in deep, almost insurmountable, debt.

WHAT WE’RE SEEINGAs we begin a slow recovery from the last !nancial crisis, there is much evidence of what could likely be a large contributor to a new one — student debt. Approximately 20% of U.S. households owed student debt in 2010. 40% of all households headed by someone younger than age 35 owed such debt and 15% of loans issued between 2010 and 2012 are at least 90 days delinquent — damaging the credit of young America. The student loan situation is unsustainable and borrowers are in for some real trouble when their wages don’t line up with their debt loads. So how have we begun to respond?A few subtrends and ideas have formed to curtail the unsustainable education loan market:

• On one end of the spectrum, there’s a growing idea for “Loan Licenses” – just like for driving or to own a gun — that would require people get licenses to borrow money. This theory holds that education and regulation will help solve these debt problems by employing math, statistics, earnings potential, etc. to determine loan amounts.

WHAT WE’RE SEEING• On the other end of the spectrum, lending institutions, including

the government, need to tighten their loan belt. In most cases, those that lend don’t distinguish between loans to students pursuing highly employable !elds and those pursuing majors that have high unemployment rates.

• Finally, many in the industry are calling for American society at large to stop pushing the notion that everyone should go to university. It took a recession and massive taxpayer bailout for Americans to realize that not everyone should, or can a#ord, to own a home. 

IMPLICATIONSAs student debt continues to overwhelm take-home pay for many young Americans, brands are feeling the a#ects too. Loan payments each month mean less disposable income in Generation Y’s wallets. But this negative could be turned on its head if relevant brands can !nd an intersection of utility to help students not only strategize and plan repayment, but to create better products and services to evaluate and monitor educational costs. At the very least, there is a huge need for more utilities to help students and parents alike better understand, evaluate, and plan for educational costs.