Advisors face a conundrum. They must help clients plan for a future that is, by definition, unknowable. Moreover, preparing a financial plan to deal with the multitude of future uncertainties doesn’t get any easier as planners become more skilled at their craft. Indeed, as a wise person becomes more aware of his limited wisdom as he ages, so an experienced planner knows that it is impossible to plan for every possibility. So while predicting the future is fraught with danger, we nevertheless must plan for it. After all, that’s what your clients look for you to provide: Not future certainty that all will be well, but a plan to sharply reduce the chances of bad things happening–running out of money in retirement, failing to preserve a legacy for children and grandchildren, falling short on indulging a favorite pastime while working or in retirement.
But what of your future? What steps will you need to take now to help ensure your success in an imagined but essentially unknowable future?
After extensive interviews with researchers, consultants, experts in investing and technology, and thoughtful advisors, here is the consensus: Four strands lead from the present into the future; we will consider each in their turn.
1: Past Is Prologue
The two main, complementary forces that helped create the modern-day financial planning profession will continue to drive the profession in the future. These two forces are altruism, defined here as the desire by advisors to serve clients better by providing objective, personalized advice, and entrepreneurship, the desire to establish a vibrant practice to serve clients now and build a business to pass on or sell.
Regarding the first force, the research supports what you suspect is true: clients value objective, conflict-of-interest-free advice from independent advisors most of all. In fact, the Chicago-based research firm Spectrem Group reported in its November 2003 survey of ultra-high-net-worth consumers, “Relationships With Advisors,” that those households with $5 million and up in investable assets not only were turning away from full-service brokers as their primary advisors, but “intentionally avoided advisors affiliated with a brokerage, bank, insurance or mutual fund company.”
As for entrepreneurship, independent advisors want to be their own bosses; many chafed under the restrictive atmospheres of their former wirehouse or insurance company employers. This yearning for autonomy does have its down side, however, since most independent advisors who wish to grow their businesses must have one or, more likely, several partners. This spectrum of independence ranges from the semi-autonomous “groups” popular at the wirehouses to the representatives of independent broker/dealers to the fee-based RIAs who shun commissions of any kind. All along that spectrum there are interdependent relationships, whether you’re a registered rep interacting with your B/D and its clearing firm or an RIA who must pick a Web site hosting company in addition to a custodian.
According to those interviewed for this article, the tools you need to build a thriving practice today are the same tools you’ll need to succeed in the future: in a word, systemization. The practice that thrives is one that systematizes its major processes, including prospecting, client services, practice management, and employee compensation.
2: Demographic Disaster
Advisors do not practice their profession in a vacuum, and we stand on the cusp of a major demographic change that will deeply affect how and to whom financial advice is provided in the future. To sum up the change, America is getting older and darker. The 2000 Census found 35 million people over age 65, or 12.4% of the entire U.S. population of 282 million. By 2050, the Census Bureau estimates that segment will have grown to encompass 86.5 million people, or 22.7% of the total population of 419 million (see An Aging America). The new CEO of the Certified Financial Planning Board of Standards, Sarah Ball Teslik, has studied demographic disasters like the Black Plague. She notes that the coming disaster will be the first “in the history of the world caused by too many people living rather than dying.” There’s little comfort in pointing out that the United States will remain in much better shape than most of the rest of the developed world, where birth rates are lower and immigration more restricted.
The ethnic and racial makeup of the United States is changing as well. That portion of the population that the Census Bureau calls “White alone, not Hispanic” stood at 69.4% of the population in 2000; by 2050, that will have shrunk to 50.1%, the Bureau estimates. By that year, Hispanics, who can be of any race, will account for a full quarter of the nation’s population. Consumer marketers and the national political parties are well aware of the changing demographics of the U.S. population regarding race and ethnicity and the economic and political power that the non-white portion of our diverse population represents. The financial planning profession and its membership organizations have responded slowly to this disconnect. Take, for instance, the makeup of the profession itself. Of the 29,000 CFPs who volunteered their racial and ethnic backgrounds in 2002 to the CFP Board (the most recent data): 94.75% were white, 75% male.
Planners have been slow to respond to the growing retirement population, too. Yes, many advisors cater to today’s retirees and are aware that the baby boomer generation is on the verge of swelling that segment of the population, but the coming changes go beyond a mere increase in the number of retirees. Tanya McDonald of Spectrem is not alone in pointing out that advisors may be adept at the wealth accumulation phase of their clients’ lives, but need different skills to handle the more challenging wealth preservation and distribution phases of planning.
Part of the challenge in helping clients plan for retirement in the future is the uncertainty of Social Security. The annual report of the two trust funds that fund Social Security and disability insurance put it succinctly: Beginning in 2018, the funds will begin to pay out more to beneficiaries than they receive in tax levies; by 2042, the funds’ assets will be “exhausted.” There are ways to fix the Social Security system, and President Bush indicated in the first days after his reelection that he would make Social Security a top priority in his second term. Making the changes necessary to “fix” the system would require the imposition of either higher taxes or lower benefits and later retirement ages, however, and senior citizens tend to vote. Even if Social Security is fixed, the growing ranks of retirement-age boomers will need help with the two other legs of retirement funding. While boomers are fond of making highfalutin’ claims to have reinvented every age of mankind, their sheer numbers can’t help but affect retirement planning in the years to come.
How much are we talking about? Cerulli of Boston estimates that private retirement plan assets will grow from the current $3 trillion to over $10 trillion by 2012.
Moreover, the number of wealthy people in the United States continues to grow. The most recent Merrill Lynch/Cap Gemini World Wealth Report puts the number of high-net-worth individuals in the U.S. (those with more than $1 million in financial assets) at 2.27 million; Spectrem estimates that in the U.S. there are 650,000 ultra-high-net-worth households–those with more than $5 million in financial assets.
As industry guru Bob Veres points out, the traditional concept of retirement is undergoing a big shift as well, from being a time to stop working to what he calls a time to “find something you enjoy doing and never want to completely stop doing; this will provide meaning in your life throughout your final years.”
Of course, many people won’t have the luxury of pursuing those goals. While the Garrett Planning Network and many individual advisors have made progress toward meeting the planning needs of middle- income and even poorer folks who are most in need of advice, there is plenty of work ahead if the benefits of planning are to be extended to the entire population.
One other demographic issue to consider is the graying of the planning profession itself. The CFP Board reports that more than 45% of the 48,000 CFP certificants are over age 50.