How do you provide high-level retirement income advice to your clients? It’s a single question with multiple answers—and it’s reshaping the geography as advisors search for ways to address what could be the toughest challenge of their careers.
“This is a much bigger ‘big picture’ change than most people are comfortable with. In retirement, you must operate at the household level, not the account level. In the investment management days, we were able to limit ourselves to working with a client’s financial capital. In retirement, it’s human capital, social capital and financial capital,” observes François Gadenne, chairman of the Retirement Income Industry Association. “A lot of advisors have been in denial. But you can’t outrun this. To do this job today, the investment manager has a new name: retirement management professional.”
While many remain highly confident in their ability to serve retirees, one research study suggests there is an undertone of worry among advisors—not only about the soundness of their retirement income strategies, but about continuing market volatility, alarmingly low interest rates and uneasy clients who just aren’t sure what to make of retirement planning anymore.
The report from GDC Research and Practical Perspectives, “Trends in Advisor Delivery of Retirement Income 2012,” tags it “the confidence dilemma.” As Howard Schneider, who heads Practical Perspectives, frames it: “It’s like advisors are walking down a dark alley with this sense of bravado about them, but they are constantly looking over their shoulders and wondering: Aren’t there better things I can be doing for my clients? How do I stay on top of everything given all that’s swirling around? It’s an enormous challenge.”
That nagging worry is also deeply affecting clients across income levels. As an example, the latest Affluent Insights Survey from Bank of America-Merrill Lynch revealed this surprising nugget: Four out of five respondents with $250,000 and above in investable assets worry that they won’t be able to accomplish certain financial goals before they retire. Forty-two percent say they’re concerned they haven’t saved enough to sustain their lifestyle in retirement, and just over one-quarter report they’re unsure they will be able to pay off or invest more in their current home, or have the inheritance in place they had wanted for their heirs.
“In the new normal that is this economy, these things may not happen,” notes Bill Hunter, head of personal retirement solutions for Bank of America-Merrill Lynch. “And whenever there is uncertainty, you look for advice or counsel. Because of the uncertainty, the conversations with clients are going to be very broad and very meaningful. This is a time to assess different priorities and different goals. It’s a new normal for everybody.”
Notably, financial services firms are ramping up their retirement income offerings. A Hearts & Wallets industry survey found that, in 2012, 77% of firms rated retirement income solutions as vitally or very important to strategic planning initiatives over the next one to three years, as compared to 57% in 2010.
What are the qualities of leading retirement income advisors today?
First, says Schneider, retirement income advice is something they deliberately focus on. It is an important element, if not the most important element, of their practice. Tied to that, top advisors have well-developed processes and capabilities. Finally, the best advisors support both traditional and non-traditional needs that arise in retirement. That includes tackling questions about Social Security optimization, Medicare, health care coverage, nursing home care and lifestyle considerations. And, in today’s vexing environment, successful retirement income advisors are also helping clients make trade-offs.
“They’re helping clients develop a realistic vision of life in retirement. Retirement is no longer that commercial vision of the beachfront house. Inevitably, it will involve trade-offs because there may not be the income to do all the things you truly wanted to do,” Schneider says. “Asset accumulation was about focusing on a rate of return and target of when you needed that money by. Retirement income is trickier, it’s about juggling objectives. Today, it’s about being much more than an investment advisor. It’s almost like being their advocate.”
Here’s a look at emerging trends in the retirement income space:
Industry statistics suggest it takes advisors more than twice the amount of time to provide retirement income advice when compared with investment management. But how do they charge for it? Recent research from Hearts & Wallets shows that 81% of firms say that advice on Social Security should be within the scope of an advisor’s offering, up from 65% in 2010. Yet as Hearts & Wallets principal Laura Varas puts it: “Social Security, Medicare, thinking through health care risk—these are not activities that historically have had compensation tied to them. Meanwhile, investors are asking: What do you do? How do you get paid? Free advice just contributes to the confusion. Why is it free? Nothing is free.”
Shannon Reid, director of retirement solutions for Raymond James Financial, agrees that compensation needs be addressed head on. One possible alternative: a law office-like model that involves an hourly fee. But, Reid adds, “For the most part, advisors are not getting paid for this kind of advice. They’re offering it as the price of doing business. There are not many models out there yet.”
Losing “the Number”
For the past few years, financial services firms have urged investors to come up with “the number”: the amount of money they need to save in order to retire comfortably. The trouble is the number — $1 million, $2 million, $3 million — simply scared people. “People say: ‘You’re kidding me, I’m never going to save $3 million.’ And they’d walk away frustrated and not do anything,” says Hearts & Wallets Principal Chris Brown. Increasingly, he adds, industry thinking is shifting to an approach that involves optimizing among trade-offs and creating a goal that is achievable.
“Now, it’s much more about: How much do you want to take per month in retirement? How much do you have now? What will you likely get from Social Security? What about work income and other income streams? Then you figure out you have an 80% chance of reaching that goal,” says Brown. “That then allows you to tweak it a bit. It takes the focus away from that big number to what are the odds and what can you do to increase the odds. That’s a big plus.” Also emerging: calculators that for the first time take work income in retirement into account.
Rethinking Withdrawal Rates
The 4% rule has been the gold standard for years but it is losing its luster as the academic community and others look for more efficient sustainable withdrawal strategies. The big problem with the 4% rule is that it only applies to married couples who are age 65 and it doesn’t factor in life expectancy or market volatility, according to David Blanchett, head of retirement research for Morningstar Investment Management. As a practical matter, Blanchett likes a strategy based on the required minimum distribution methodology established by the IRS for qualified plans. The calculation: one divided by life expectancy. In other words, if your life expectancy is 12 years, your withdrawal rate from your portfolio would be 8.3%. If it’s 30 years, it would be 3.33%.
“This is a better way to think about it than 4% for everyone. Most research on income strategies [assumes] you make a decision and do the same thing for 30 years and never revisit it,” says Blanchett, co-recipient of the 2012 Thought Leadership Award from the Retirement Income Industry Association. “This is one of the strategies we’ve tested and it works quite well. It’s a reasonable alternative to the more common constant dollar and constant percentage of assets withdrawal strategies. The moral of the story: You need to think about what is an okay amount of income every year.”
Seeking a New Framework
There remains no universal approach to providing retirement income support, although the use of systematic withdrawal oriented strategies appears to be declining in favor of solutions that incorporate guaranteed income, according to the latest study from GDC Research and Practical Perspectives.
In one notable shift, the report notes, many advisors are moving away from a total return approach in favor of dividend paying equity investments, variable annuities and alternative investments.
“And there’s sort of a disconnect,” says Schneider. “When product providers talk about retirement income, they talk in the context of a solution to provide you with income or cash flow. Advisors talk about income and cash flow but they’re also talking about retirement income at a higher level, and an income strategy is just part of it: Have you chosen the right beneficiaries? Are you in a house that’s too big for your needs? Should you consider a deferred annuity that can start in 20 years? Support in this area can’t be done piecemeal. It’s all got to be integrated and thought through in a comprehensive, consolidated approach.”
Reconsidering Deferred Annuities
Given the environment, it’s no surprise that the ever controversial annuity is getting a harder look. “People have different views of annuities and what they can do,” says Hunter. “But when you break down the product without thinking about the label, few vehicles can support a steady stream of income for 20 and 30 years as well as an annuity.”
In particular, the deferred annuity—or delayed income fixed annuity—has piqued the interest of retirement income advisors who like the income stream that typically starts at age 85, especially when coupled with Social Security payouts.
“That allows you as an investment advisor to manage the rest of the portfolio for a more finite period of time. You can be more aggressive. And it may allow the retiree to be a little less concerned about the bumps in the market, ” says Jim Wright, chief investment officer of Harvest Financial Partners in Paoli, Pa. “From an advisor’s standpoint, they make a lot of sense to me. We’re starting to have conversations with clients about this. I do think it’s something that makes a lot of sense for certain clients.”
Building a New Business Model
Imagine, one day, the existence of a broker-dealer that actually brands itself as “the retirement income broker-dealer.” That day has arrived.
Over the last year, Symetra Investment Services President Richard Moran has refashioned the 26-year-old firm as a retirement income specialist. The firm has roughly 400 advisors, holdovers as well as new recruits, who largely serve the mass affluent market. Symetra has partnered with Pershing, Russell Investments and PIMCO, among others. The growth plan: a network of 1,200 to 1,400 retirement income advisors over the next few years.
“Americans have never been more challenged than they are today to solve for the income equation in their retirement years. Advisors have the greatest opportunity to build their practice meeting the needs of those Americans,” Moran says. “We are putting the flag in the ground. We aspire to be the very best independent broker/dealer in the retirement income space.”