October 6, 2013

How Onslaught of Retirees Threatens an Advisor’s Practice

What does it take to maintain a profitable practice in the client distribution stage?

“If you think only clients are worried about the distribution phase, think again,” Charlie Farrell presciently notes.

The CEO of Denver-based Northstar Investment Advisors is on something of an evangelical bent of late, warning advisors of the difficulties of running a profitable firm in the retirement income management space.

“It’s a whole different style, structure and service model,” Farrell, author of “Your Money Ratios: 8 Simple Tools for Financial Security,” explains. “The amount of interactions necessary to feed clients distributions from different accounts, all with different timing and tax issues (in addition to special one-offs) will increase precipitously. Essentially the service levels will double, but the fees will not.”

This “levelized” or declining asset base will combine with bear markets and an increased need for income due to health issues to create a situation where the advisor will find themselves with fewer clients, increased costs and decreased revenue.

“The need for a scalable and efficient practice will be more important than ever.”

He cites a tipping point of between 20% and 25% of an advisor’s clients in distribution mode “that will really start to affect the efficiency and profitability of the practice.”

“Some advisors may say, ‘I make enough money,’ and that’s fine if they want to run it out themselves, but they can’t sustain and build on something that way,” Farrell adds. “They still need to hire good people, invest in technology and other issues specific to the successful management of the practice.”

Advisors may not be as aware of the looming threat as they should be, because the number of client interactions are far less in the accumulation stage, “and there are fewer tax consequences when adding to an account.”

In the distribution stage, however, many clients will typically have between three and six accounts, all with different tax structures and implications.

“The health issues that will occur as they get older, combined with family members and heirs that typically get involved as clients grow older will consume more of the advisor's time,” Farrell concludes. “Something like an estate settlement is extremely time consuming and expensive. Eventually, advisors might charge extra for this, but the business model as of now is that it is included in the advisor's fees.”

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Charlie Farrell will be a speaker at this year’s Think Retirement Income Conference in Boston on Oct. 10 and 11. For more information and a list of other speakers, please visit www.thinkretirementincome.com.  

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