August 17, 2012

Olivia Mitchell, Kent Smetters, Others Reveal Holes in Retirement Advice

All-star team provides a big-picture view of the gaps between services on offer and what potential clients really need

A journalist will normally review a book soon after publication, but the importance to financial advisors of a new volume taking a global view of the market for retirement financial advice warrants a preview.

The Pension Research Council (PRC) at the University of Pennsylvania’s Wharton School on Friday released a working paper, “The Market for Retirement Financial Advice,” which introduces chapters in the forthcoming book (slated for publication this fall by Oxford University Press).

Olivia MitchellThe book is edited by Wharton professors Olivia Mitchell (left) and Kent Smetters, two PRC-affiliated Wharton professors whose names should be familiar to AdvisorOne readers. Mitchell, the PRC’s executive director, is one of the nation’s foremost experts on retirement security, and in 2010 received the Retirement Income Industry Association’s award for achievement in applied retirement research. Smetters, though primarily a scholar, actually rolled up his sleeves and created a full-service financial services firm called Veritat, which sought to provide comprehensive and affordable advice to middle-class investors. He sold the firm last month to LPL.

Kent Smetters“Financial advisors play a key role in helping their clients meet their life goals,” Smetters (right) told AdvisorOne. “But the financial advice industry is rapidly changing, providing both new challenges and opportunities. Our intent…is to help advisors and policymakers understand these changes, ultimately to the benefit of consumers.”

Citing Labor Department estimates that uninformed investors lose billions of dollars each year though financial mistakes, Mitchell and Smetters’ project is geared to increasing both the quality and quantity of financial advice.

Consumers, they say, face increasingly complex financial decisions regarding when to stop working, when to claim Social Security, how much to withdraw from retirement accounts and whether and when to annuitize retirement assets.

And surveys show millions of people want to discuss these issues with a trusted professional advisor. Indeed, the authors cite research saying some 15 to 32 million households would like to pay for this service, but not all avail themselves of financial advice, viewing it as conflicted or unaffordable.

The current market mismatch between services wanted and provided may undergo change as the result of a “regulatory renaissance” underway on a global scale. The U.K. and Australia have already banned commission-based financial advice, but Mitchell and Smetters note the effort to adopt a universal fiduciary standard in the U.S. has been bogged down by regulatory fragmentation and industry resistance.

Specifically, the division of regulatory responsibility for financial advisors among the SEC, FINRA and the states, and the existence of two competing standards of care—a suitability standard for broker-dealer reps and a fiduciary standard for investment advisors—result in confusion in the marketplace. (And the authors note that dually registered advisors operating as both RIAs and broker-dealer reps only compound the problem.)

Meanwhile, competing financial regulatory legislation adds further to the uncertainty, as both the SEC and FINRA now have claims to provide oversight of investment advice.

In this environment of growing consumer needs and regulatory upheaval, Mitchell and Smetters seek to bring various experts to bear on the current state of the retirement advice market.

Pension experts John Turner and Dana Muir contribute a chapter examining the byzantine world of the various market segments proffering services as financial advisors. Financial advisors Paula Hogan and Rick Miller examine how financial advice differs in theory and in actual practice, particularly on the subject of assessing client needs and explaining risk, a subject Hogan discussed in a recent AdvisorOne interview.

Mathew Greenwald and Lisa Schneider, conultants at Mathew Greenwald & Associates, and Andrew Biggs, an American Enterprise Institute scholar, look at the critical retirement question of claiming Social Security benefits. Their research finds that most workers make suboptimal decisions, typically by seeking benefits too early.

Alicia H. MunnellAlicia H. Munnell (left), Natalia Orlova and Anthony Webb of the Center for Retirement Research at Boston College address the topic of asset allocation and conclude that, because most workers lack substantial assets, financial advisors should gear their support of clients to pushing them to increase their savings. Jason Scott of Financial Engines contributes a chapter on how to encourage workers to contribute to their workplace retirement plans.

Kelli Hueler of Income Solutions and actuary Anna Rappaport examine decisions involving annuities and discuss how a particularly valuable retirement solution, life annuities, makes up just a small portion of the advisor-sold annuities. Rappaport recently discussed the question of whether to annuitize with AdvisorOne.

The book also examines questions of advisor efficacy, with a chapter by University of Utah professors Cathleen D. Zick and Robert N. Mayer exploring the impact advisors have on client choices; another by the RAND Corp.’s Joanne Yoong and Angela A. Hung marshalls evidence from survey data that show unsolicited general advice has limited value whereas actively solicited advice improves investor performance.

Andreas Hackethal and Roman Inderst of Goethe University offer proposals to improve financial advisor performance by, for example, providing incentives for them to provide unbiased advice. Research magazine contributing editor and Texas Tech professor Michael Finke contributes a chapter on how financial services industry products may be too costly for most households and shows how a focus on fee income over commissions may improve the quality of financial advice and financial outcomes for investors.

The Investment Company Institute’s Sarah Holden looks at survey data to understand how mutual fund investors use financial advice and finds that household wealth is a key determinant; specifically, households receiving financial advice have average assets of $170,000 compared with an average of $85,000 for households not having an advisory relationship.

A final chapter of the book by the Government Accountability Office’s Jason Bromberg and Alicia Puente Cackley offers an overview of the regulatory framework of the advisory market, explaining why Depression-era laws divided regulatory responsibility for once-distinct broker and advisor jobs that today overlap to a considerable degree. The GAO contributors look at alternative approaches to harmonizing financial advisor regulation.

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