From the June 2007 issue of Investment Advisor • Subscribe!

Quilting Bee

Financial products must consider the full spectrum of clients' retirement risks

When it comes to mitigating risks for clients in retirement, advisors and product manufacturers must stitch together products and strategies that help clients meet the full spectrum of their needs--from long-term care, to income generation, to health care.

That was the message that Pam Schutz, head of Genworth Financial's Retirement and Protection division, delivered to Genworth's top advisors in early May in Washington. Only those advisors and manufacturers who "understand the full context of the retirement landscape," she told advisors, will be able to capture the huge amount of retirement assets at play.

Consider research released recently by McKinsey & Co., she noted, which reported that more than 60% of assets in the U.S. are in retirement vehicles. To grab a portion of this "massive pool of money," Schutz said, it's imperative for advisors and manufacturers to work together so that they can address the full spectrum of retirement risk. Four client risks must be addressed, she said. The first is ensuring that a client's investments meet expectations. At a minimum, advisors should ask if clients' assets are properly allocated, and if they've made good fund choices. The second risk is determining whether a client will have adequate guaranteed income for life to cover the basics or more. Third is making sure clients take care of their healthcare costs. (In a separate conversation after her speech, Schutz said that while long-term care and Medicare supplements are available to help with healthcare costs, "if you look at the industry, there is some work to do on products and helping advisors integrate [those products].") The fourth risk is determining whether a financial plan can withstand severe health risks or prolonged health problems.

The Solutions

To help consumers address their retirement risks, and execute successful business models, Schutz said five key components must be tackled: consumer education, products, advice models and technology, public policy, and thought leadership. To be more successful in affecting change within these components, Schutz said advisors should pick an area to focus on "and tighten and stitch together strategies in those areas."

Focusing on products and public policy, the industry must continue to be innovators, Schutz said, creating products that span the landscape of retirement risk, are flexible and easy to understand, and are what consumers want. Most of the products available now are siloed, she said, by an annuity, a life insurance, or LTC product and are "not connected." They are also inflexible, and fail to change with an "individual's revolving needs." This is beginning to change however, she said, as manufacturers are developing products that stitch solutions together.

In January, Genworth combined its U.S. retirement and protection divisions into one, which enabled the company to not only show "one face" to distributors, Schutz said during the separate conversation, but to start putting together the long-term care, annuities, managed money, and income products. "We see a ton of opportunities, particularly when you think about stitching together accumulation, income, and healthcare type products."

Such products include Genworth's Total Living Coverage, which provides long-term care and life insurance. Genworth plans to release this year a managed money income product which she said will include a "guaranteed income solution overlay on a managed account platform." Today, she said, "you see a lot of assets on fee-based managed money platforms." However, "what you don't have on those platforms is the opportunity for protection [against] your assets running out because of market performance or outliving your money."

As for public policy, Schutz said it's imperative for the industry to continue to influence public policy "so that the environment in which we work is conducive to mitigate retirement risk and building our businesses." Notwithstanding the Social Security and Medicare situation, "there are lots of opportunities [to affect policy] because the focus hasn't shifted enough to income and healthcare," she said. The federal government, too, "is uniquely able to increase financial literacy about retirement risk, but education programs haven't been adequate." Public policies must be created that encourage individuals to create their own financial security, she continued. Some progress has been made in the Pension Protection Act as well as the Medicaid State Long-Term Care Partnership Program Act of 2005, legislation that passed as part of the Deficit Reduction Act. The legislation became effective in 2006, and encourages individuals to obtainprivate long-term care insurance. "This protects assets equal to a policy'sbenefits," Schutz said, "and results in fewer people relying on Medicaid."

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