Anxieties swirl around financial planning for baby boomers as they begin entering what have traditionally been known as the retirement years. Most advisors are now beginning to ask the question, "retiring to what?" Do clients plan to pursue retirement activities for which they have a latent or dormant passion? Will clients be able to live off the assets they've accumulated, or will they need to continue to work? How long will those assets last if they are no longer contributing to principal? Are they emotionally ready for the transition?
While the questions for today's retiring clients are now becoming intuitively obvious, advisors who have focused on the pre-retiree and retiree markets for the past 10 years or so will need to reflect on what will happen to their own financial position over the next five to 15 years now that boomers are once again threatening to change our economy and our culture.
Some argue that there are veins of gold in 401(k) rollovers and the conversion of illiquid assets like real estate and small businesses into cash, creating a dramatic spike in income for advisors. Others caution that the voracious appetite of baby boomers to feed their own lifestyles, and our extended lifespans due to better healthcare and expensive life-sustaining treatments, will rip away principle from portfolios faster than you can say "rollover."
Whatever your assumptions about the risk or opportunity, advisors who are serving this baby boomer market (which is the majority of financial advisors) need to assess whether their practices are prepared. If you buy the liquidity argument, then do you have the physical capacity to handle more client relationships? If you buy the distribution vs. accumulation argument, then do you have the pricing strategy in place as well as the time for clients who will require more planning but who will be reducing the fees paid to you based on their assets under management?
The major consulting firm McKinsey & Co. estimated that almost 60% of all clients have changed advisors at least once in the 15 years leading up to retirement, with many having changed advisors two or more times. The VIP Forum, in its 2005 report, Coming of Age: Best Practices for Serving Affluent Pre-Retirees and Retirees, observed that 23% of retirees over age 60 expressed a willingness to listen to another advisor's pitch, and 13% of these folks switched advisors in the past 12 months.
The reasons for this lack of loyalty appear to be tied to a gap in perception between client and advisor. Most advisors will ask, "What's different? I've been working with retirement portfolios for years." Meanwhile, clients are saying that they are not sure the advisor they relied on in the accumulation phase has the necessary skill set to help them manage through the distribution phase.
The competitive threat to advisors with pre-retiree clients comes from outside the independent advisor community as well. Many clients also work with insurance agents, CPAs, attorneys, and bankers who also covet deeper relationships with those clients once they become liquid.
According to a survey done by The Tiburon Group (The Future of Advice 2005), clients with $1 million to $5 million of net worth have on average three professional advisor relationships, and those with $5 million to $10 million have more than 4 professionals. If there are roll-overs to be had, or private accounts to be managed (depending on whether the current administration has the political muscle to make this happen), or other opportunities to convert those assets into fees, the marketing push by the competitors will be on big time.
This competitive threat has caused one broker/dealer, Commonwealth Financial Network to do some reengineering inside their firm to help their advisors be better prepared. For example, they are creating a model "distribution policy statement" as a replacement for the investment policy statement for clients who enter into the portfolio depletion mode. Commonwealth has committed substantial resources to training both internal staff and advisors on processes and products that match up well with boomers; and they have also begun to develop marketing tools to help their advisors be better positioned for clients and prospects who are within this demographic.
The fundamental shift from "retirement planning" to "retired" planning will be a challenge for advisors who have always focused on continued growth. There are at least four areas in which advisors should examine their preparedness for the changes in their client base:
1. The value proposition
2. Pricing strategy
3. Relationship with clients and their successors
4. Succession and practice continuity
The Value Proposition
As an advisor, your big questions will revolve around how your advice will change and how your service and product mix will change. I recently spoke at a conference focused on the retirement wave, sponsored by Commonwealth. Many participants felt strongly that financial planning will take on an even more compelling purpose for pre-retirees seeking professional help, and asset management will have a diminished weight (relatively speaking). They felt that advisors who have tied their value proposition to investment returns and quarterly reporting may find that they are being pushed to the limits of their abilities and interests if they don't make some fundamental changes in their approach to clients and their base of knowledge.
While knowledge of financial products geared towards income, risk management and safety will continue to be important, once clients are not working full time, the fear is that they will demand more hand-holding from their advisors as they navigate through more emotional terrain such as illness, death, wealth transfer, and charitable giving strategies.
Although the point has been raised ad nauseam that fees tied to assets under management may not represent your total value to the client, the fact is that in some form the vast majority of both RIAs and broker/dealer reps tie their income to the value of their client's assets. This comes in commissions, 12(b)1 trails, and asset management fees. While a number of advisors have wisely implemented either a retainer or project fee program so that they get paid for all the non-investment services they provide, our studies show that the lion's share of income is still generated from assets under supervision.
Given that most advisors tend to work with clients their age or older, the risk to those who rely on fees from assets is that they may see their total revenue flatten out or even decline as greater numbers of clients begin taking distributions. Initially, this squeeze will be subtle but eventually the financial pain will become acute as the bulk of their best clients begin enjoying income from their invested assets at some material reduction in enjoyment for the advisor.
Relationships with Clients and Their Successors
Advisors often tell us that they have very deep and binding relationships with their clients but that relations with the children of their clients are more tenuous. Often, these children have moved to another community or have built their own network of professionals with whom they are more compatible and who are closer to them in age.
The opportunity for advisors working with affluent individuals is to systematically build relationships with successors in hopes of continuing to provide advice to the next generation. This may require adding younger staff who can grow with the inheritors of wealth and who may have the energy and passion to rebuild the growth engine for the business again.
Meanwhile, advisors who have been more comfortable hiding behind charts, graphs and computer screens as they help their clients grow their portfolios may find they will need to dig deeper to find empathy, patience and insight into why their clients may become uncompromising in their later years. This intransigence is especially acute for those clients whose business or professional lives have defined their existence and purpose in the community.
Succession and Practice Continuity
We also heard from a number of advisors at the Commonwealth conference that more and more of their clients are asking, "What happens to me if something happens to you?" While this is not a new question for the profession, for many it is just being posed for the first time by their aging clients who see the wrinkled and graying reflections of themselves in the faces of their advisors. Some of the other speakers suggested that this anxiety over who will look after their wealth is a compelling reason for clients to seek a bigger firm, an institution or partners who appear to have the health and energy to work with clients from this point on. Who would have thought that the profession would be experiencing age discrimination at such a young age?
The aging of America is no surprise to anybody who has been around the financial services business for any length of time. But this conversation has been carried on in more theoretical terms and sounds like talk among sports fans at the beginning of the season when they venture to pick who will win that year's Super Bowl or World Series. Rarely do we hear advisors bring the discussion down to the level of their own practices and how they are taking the steps necessary to translate this cataclysm of events into meaningful results for their businesses. Much of the behavior is "wait and see," like tracking a hurricane then rejoicing as it shifts away from your town (while wreaking havoc in someone else's neighborhood).
I'm not predicting that there's a disaster on the horizon. Advisors as a profession have proven to be remarkably resilient and adaptable, but clearly if one has a very large proportion of baby boomer clients, if you don't position your business correctly, and begin pricing your services appropriately, you'll find it prudent to plan how you will manage through declining income and diminishing value.
Mark Tibergien, a principal in Moss Adams LLP, is chairman of the firm's Securities & Insurance niche. The nationally known consultant is co-author of Practice Made Perfect, available through the IA Bookstore, and author of the newly published, How to Value, Buy, or Sell a Financial Advisory Practice. E-mail him at email@example.com.