April 7, 2010

Growth and Funerals in Retirement

Francoise Gadenne of the Retirement Income Industry Association offers his views on social and financial capital, noting "Your assets are only worth what today's children will produce."

One of our co-workers at the Retirement Income Industry Association is living an aspect of retirement that we tend to ignore, because we do not experience it often before then.

In the past few months, he has been attending funerals at a rate of about one a week. Indeed, a rarely discussed aspect of retirement is about looking back at lost family and friends.

While this is a real aspect of retirement, it does not have to be the central feature of retirement.

Life is not about looking back and losing friends. Life is about growth and making new friends.

Retirement is also about growth and making new friends because somebody has to pay for it.

As a long standing family joke, my older daughter reminds me before Christmas to give her nice presents, because she is the one who will choose a nursing home should it become necessary. My response to her is that I am counting on it, because she and her siblings are my retirement plan.

Recently, RIIA members were discussing the importance of not only financial capital but also of human and social capital in preparing reliable retirement plans.

I mentioned my daughter's comment, and to my surprise many in the group has not made the vital link between children and retirement. Many had not thought through the fact that their assets and claims are only worth something because their and other people's children will be producing the goods then that will make these assets and claims worth something.

Whether it is your own children who will take care of you from their own efforts and earnings or whether it is other people children, your social capital and financial capital assets are only worth what today's children will produce in the future when you exercise your claims.

Your human capital is what you produce yourself. Their human capital is what makes your social capital and your financial capital worth something that you can exchange for the things you need in retirement.

In the end, funerals notwithstanding, retirement is about life, growth and making new friends. Our children, all grown-up or otherwise, are all about life, growth and making new friends.

Much like our personal story about growth vs. funerals, a founding member of RIIA points out that accumulation connotes increased revenues or profit because the current business model of financial institutions prices by the pound.

On the other hand, decumulation implies less and financial institutions have not yet figured out how to increase revenues or profit from "less."

What is the business story here?

In the early-2000s, the financial industry was slow to address the growth potential of the transition from accumulation to decumulation. Consensus naming conventions reflect this slowness of adaptation.

Accumulation is a consensus naming convention, so are the words: investment management, investment management professional, investment advisor, and asset allocation.

On the other hand, decumulation and distribution do not feel like consensus naming conventions because research shows that many retirees are net savers and the word "distribution" can be confused for what the sales channels do.

Use those two words and you are more likely to start a debate rather than to communicate a reliable point.

RIIA was started in 2006 so that members could work inside their company and externally on RIIA Committees to understand what can and what must be named and done differently in decumulation because of:

- Changing investors needs as they approach and enter retirement,
- Resulting and fundamental changes in business model for retirement income,
- Broader matching advisory processes and distribution strategies, and
- Reprioritized product features and development.

Indeed, during the mid-2000s, the industry created retirement income units in a variety of configurations including studies, project teams, task forces, staff units, matrixed units, product units in traditional P&Ls, new P&Ls, new business divisions, start-ups, etc.

Along the way, the words retirement income, retirement management and retirement professional became commonly used naming conventions. They are now understood reliably for what they mean.

However, some of these retirement income unit configurations proved to work better than others. RIIA documents this record of organizational successes and failures and reports the findings to the membership.

Since September 2008, ostensibly for budget reasons, many retirement income units have shut down or have been merged into a traditional product or sales channel P&L. It may be that "budgets" were a convenient explanation for a larger issue.

Kerry Pechter, publisher of the "Retirement Income Journal," editor of the curriculum book for the Retirement Management Analyst (RMA) designation and a RIIA member, describes the larger issue as follows: Bringing together a diversification culture (Funds) with a risk pooling culture (annuities) to create an integrated product development/distribution effort has not worked very well.

From an evolutionary point of view, we know that fish can become birds given enough time. From a business point of view, forcing the pace of evolution by dropping the equivalent of fish and birds in the same unit is not likely to create successful hybrids.

At this point, many of us at RIIA believe that companies would have had more success treating retirement income units as process rather than product divisions. A process approach can create a more measured pace of business evolution.

The winning level of integration may be at the level of the advisory process rather than at the level of the hybrid product. For more details behind this thinking, take a look at RIIA's Advisory Process and the curriculum for RIIA's Retirement Management Analyst (RMA) designation.

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