Outspoken mutual fund executive Bill Hol-land recently told an industry conference that he pays absolutely no attention to demographics as being a driving factor in the future of the wealth-management business.

The comment from the CEO of Toronto-based CI Financial Income Fund surely smacks of heresy to some, but a new report cautions that demographics are, in fact, a notoriously unreliable forecasting tool.

In the financial services industry, demographic trends are often viewed as critical predictors of future demand. The underlying assumption is that people’s consumption, borrowing and saving behaviour will generally follow a well-defined, common path throughout their lives.

Most people spend and take on debt in their early working lives as they buy houses and fill them with belongings. They shift to more aggressive saving in middle age, in anticipation of retirement, and then into savings-depletion mode as they draw on their nest eggs during retirement. It is also assumed that people will alter their asset allocation in a similarly predictable fashion, loading up on equities when they are in their prime saving years, and shifting from equities to fixed-income as they begin drawing on savings to fund retirement.

Couple the behavioural trends with current population data and future forecasts, and you should have a pretty good idea of where demand for financial assets is going to go, say the acolytes of demographics.

A recent report from Royal Bank of Canada, however, argues that “demographic forecasts have been spectacularly wrong for two decades,” and, as such, their “usefulness as a predictive tool of analysis must be treated with great care.”

Many analysts and industry executives may treat demographic data with reverence rather than care. But, as Holland said in mid-January, demographics is something that marketing people talk a lot about, but it’s not something that he spends any time on: “We look at the products people want today, the products they are likely to want in a year or two, and that’s it. I think playing this ‘boomernomic’ theme is really nonsense.”

The RBC report, authored by assistant chief economist Derek Holt, backs up Holland’s stance. It says demographics can be useful at informing the bigger picture, and in forecasting trends in specific niches in which its analysis has proven more reliable.

“On its own, however,” Holt adds, “it is not terribly useful in terms of predicting financial returns, growth in either debt or saving products, or shifts in the composition of financial assets.”

The report argues that simple demographic forecasts tend to fail for the basic reason that the underlying assumptions are too rigid. For example, the report notes that forecasts typically ignore the fact that households are adaptable and responsive to changing market conditions. Moreover, long-run population forecasts are similarly susceptible to unanticipated shifts in fertility, mortality and immigration trends. The result is often large forecasting errors.

“The problem with demographic analysis is that it often entails holding everything else in the world constant at a fixed point in time,” the report argues. “This thereby rules out the ability of human behaviour to adapt to change, eliminates any role to be played by changing technology, ignores institutional changes such as trade liberalization and the associated rise of China, and treats everyone within the same age bracket as being virtual carbon copies of one another.”

The report adds that such analysis also usually ignores the possibility that the forces of globalization will counteract prevailing trends.

Indeed, the ability of macro forces to help cushion the blow of demographic trends — namely, aging populations — has been identified in other research.

About a year ago, a wealth-management report from UBS Financial Services Inc. indicated the impact of demographic shifts on the global economy and financial markets probably would be overwhelmed by other fundamentals, such as geographically diversifying earnings, increasingly integrated global capital markets and shifting pension plan allocations.

The RBC report goes further, arguing that demographics don’t even do a very good job of predicting population trends. It points out that Statistics Canada’s population forecasts in the 1950s proved to be off by about 50% by the 1970s because the agency missed both the baby boom and heightened immigration trends. The U.S. Census Bureau made similarly massive forecasting errors of its own, the report adds.

The RBC report notes that such forecasting remains perilous, as reflected in the wide range of estimates that demographers give their predictions. For instance, the difference between the high and low estimates for the U.S. population in 2100 is about 900 million — ranging from a low estimate of 283 million to a high of almost 1.2 billion.

@page_break@This is not to say that demographics are a complete waste of time. Indeed, the RBC report points to a few specifics that have proven predictive power, such as business start-ups, ownership of vacation properties and inheritances. In each area, demographic analysis does have something to tell us.

For example, the report finds that trends in business start-ups are pretty clear. Business creation tends to flourish among people in their 40s and 50s, and then ownership tails off at later ages as the founders sell or pass along the businesses to their descendents.

As a result: “Small-business markets may well spend the next decade in succession planning and consolidation mode, while start-up rates suffer.”

Similarly, trends in vacation-property ownership have proven fairly well correlated with age over time: ownership rates rise with age until people get into their 50s, and then begin falling off. Given Canada’s current population distribution, this may portend a weakness in demand for vacation properties in the years ahead.

Finally, there’s the question of inheritance. Whatever the other failings of demographic analysis may be, demographers can confidently predict that, ultimately, everybody dies. They can also reasonably assume that the accumulated wealth of the dead will be passed down to successive generations.

The looming wealth transfer has some financial firms salivating. The RBC report points out, however, that the wealth is highly concentrated, is likely to remain so and the actual transfer remains far off.

The report also notes that the vast majority of wealth is concentrated within a relatively small group of people.

For example, U.S. household wealth currently totals about US$50 trillion — but US$35 trillion is controlled by the top 10% of households, and the top 25% collectively control about US$43.7 trillion. “It is probable that, after paper shuffling within families, a tight distribution of wealth will continue such that many firms may be competing for close relationships with few families,” the report says.

So, while a large wealth transfer may be materializing on the horizon, that doesn’t promise easy pickings for financial firms. Also, the big wealth shift isn’t expected to start for a dozen years.

The wealth transfers between the baby boomers’ parents and the boomers themselves will be relatively small, as the parents have less than half the wealth already controlled by the boomers, and the inheritances will be spread across a large population.

The really big wealth transfers won’t begin until the boomers start passing on assets to their kids, which RBC says won’t begin to happen until the 2020s and will continue for about 20 years.

Then there are questions about what people will do with their inheritances. The financial services industry likes to assume that the funds will be saved and invested, and that they must try to capture their share of the largesse. The RBC report notes, though, that companies, charities and governments will be competing for a share of the windfall.

Moreover, Holland suggests that most people seem to spend their inheritances: “I think the money becomes less invested over time, not more.” Assuming that a large intergenerational wealth transfer will be a boon for financial services firms is, to his way of thinking, “something that’s way overblown.” IE