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Tapping Into Middle America

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After seven years of watching clients approaching retirement waltz into his office with no previous history of working with an advisor, Frank L. Netti, a financial advisor and CIMC with Wachovia Securities in Syracuse, New York, figured it was time to put pen to paper and spread the word about the importance of financial advice. In his new book, Retire Sooner, Retire Richer: How to Build and Manage Wealth to Last a Lifetime (McGraw-Hill), Netti provides retirees with a lesson plan on what types of insurance they’ll need in retirement, ways to improve their money-management decisions, how to make the best use of their retirement distributions, how to use a rollover IRA to leave more to their heirs, what type of advisor to use, and how to pay an advisor.

Netti believes advisors are ignoring an untapped market: middle-class American retirees. As advisors, “We’re all trying to serve the high-net-worth, but there are 10 times more people below the $1 million level in liquid assets that need an advisor’s help,” Netti says. With this book, “I’m trying to get Middle America turned on to financial advice and [to help them learn] how to build and monitor a relationship [with an] advisor.” The book is a must-read for advisors, Netti says, because it provides them with the inside scoop on how to deliver services to these retirees. I spoke with Netti about his book in May.

When and why did you decide to write the book? The book was developed when I was with First Albany Companies, a regional brokerage firm in New York. So it began as a book about New York state retirees. First Albany merged with First Union in July 2000, and then First Union merged with Wachovia last year. By then, the book was already done, but having moved from a regional to a national firm, I began to realize the scope of the book had to be broadened to include all states. And my theme came from seeing many retirees coming into my office early–between the ages of 54 and 62. So they were not qualifying for Social Security. They had to live off their pension distributions, 401(k)s and IRAs, and any savings. And at the top of the market in February 2000, I realized that you could not project double-digit returns for stocks; you could not guarantee those returns, and many people were ignoring less risky bond funds and buying equity investments. I said to myself, “Well, these retirees, if they are retiring earlier and living longer, might be talking about a 30- or 40-year money management plan.”

You advise retirees to use an endowment fund approach to retirement? While I was studying for the Certified Investment Management Consultant designation, there was a study of how endowments and retirement plans manage money for a long period of time, with the purpose of not running out of money but to grow money and get a steady form of income. And I said, “This is what retirees need to do: take an endowment-plan type of investment approach and because of their longer life expectancy and savings years, they’re going to have to take withdrawals for many years.”

So most pre-retirees and retirees don’t seek out professional advice? That’s right. And they don’t know how to judge if that financial advice is the best. Ninety percent of the retirees that I work with had never worked with an advisor before. They’ve built up these large monies in 401(k)s on their own with education from the company or through what they’ve read. And at least 90% of them have not worked with an advisor on a relationship level that this book introduces. If [retirees] take an endowment approach and become their own CFO, they’re going to use professionals to help them better allocate assets, and then use professionals to help them invest and monitor those securities. The client needs this relationship with professionals, just as the endowments do. Now that people are living longer and retiring earlier, they, like endowments, are managing money much longer if they want to leave money to their heirs. The endowment way of managing money should apply to almost every retiree with more than $200,000 in assets to manage.

The book is written for the retail client, pre-retirees and retirees. How can advisors pick up this book and learn from it? Advisors are going to get a great deal out of this book. They can use this book to build a practice to serve pre-retirees and retirees, because they’ll know where [clients are] coming from and can learn how to protect clients from running out of money.

That is a big issue for retirees now? It’s a big issue. We’re in a new era where more is given to these retirees in lump sum distributions, and more [of their retirement] is dependent on how well they do with that lump sum to create a lifestyle. Now, you’ve got people with no pension check and no Social Security because they are retiring early, so you have a much different retiree.

What is the number-one mistake pre-retirees and retirees make? The biggest mistake is that they withdraw too much [from 401(k)s and IRAs]. Many retirees are under 59 1/2, and they take the highest possible draw, or they’re over 59 1/2 and they take 10% or 12% out and they’re told by their advisors that they can get that kind of return. That’s another thing the advisor has to be aware of: You’re talking to a person who may run out of money if the withdrawal rate is too high. I’ve had people come in from other firms who’ve had 10% withdrawal rates, and in the last three years their accounts went from $400,000 to $70,000. These people don’t have a choice but to go back to work. They thought they could go back to work at their own leisure, if they wanted to, but now they must go back to work and save for retirement all over again. This is due to poor retirement advice. Advisors who want to work with retirees have to be more educated and more cautious and learn how asset allocation works and modern portfolio theory works, how endowments manage money, how to look at what insurance people carry. For instance, do they carry long-term care insurance to protect assets? Do they have enough assets even to protect with long-term care insurance?

You cover insurance in the book. What are the most important types of insurance coverage for retirees? Many times life insurance has to be reevaluated for several reasons. You might be able to sell the client a policy that costs less than their current one; you may be able to roll the insurance buildup of cash value into an annuity and annuitize; or you may be able to protect them from losing their entire estate by an insurance trust. So when looking at the retiree, you might as well do estate planning at the same time that you’re doing financial planning and retirement planning, because estate planning is a concern. Even though estate taxes have gone down, long-term care costs can eat up the entire estate, so you can protect that with life insurance and leave some [assets] to your children. The retiree needs to know estate planning and insurance planning, and that’s why my team includes a CFP who knows insurance and estate planning. The book covers insurance planning, estate planning, retirement planning, and money management.

Isn’t long-term care insurance hard to qualify for? If you don’t qualify for long-term care, which many people don’t, it’s easier to buy life insurance. I’d say nearly 40% of the people we see are turned down for long-term care insurance. That’s why long-term care should be reviewed [when the client] is young because it keeps the cost down and the client is healthier and has a better chance of buying it. Many retirees say: ‘We’ll talk about long-term care when I’m 70.’ But this is the time to talk about it if [the client] has enough assets to protect; you don’t just sell it to everybody. We say if the premium on the long-term care is between 1% and 1.5% of the total assets under management in the client’s retirement account–liquid assets–then the client should get long-term care if they qualify. Because now you’re using long-term care insurance to protect those assets. How many advisors know that? Very few.

Why do some retirement plans fail while others succeed? Most fail because of poor asset allocation and too-high withdrawal rates. In both areas the advisor has to learn how to counsel the client. I feel as advisors we’re moving to a more fiduciary-like relationship with our clients; they are now dependent on us for this long-term program.

What else should advisors know about your book? I think advisors need to keep educating themselves. This book helps them to realize the great need to be on top of the rules and laws as they apply to retirement accounts, especially IRAs, and educate themselves in product areas like long-term care insurance. If they are money managers, advisors can hire someone who’s good at insurance and long-term care to supplement their business. Or they can create a relationship with an insurance agent who can refer clients to them. I say to clients: “Build up your team. Your team should be made up of a financial advisor who manages your money, your accountant, and an attorney.” Collaboration is just beginning.


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