Anxieties swirl around financial planning for baby boomers as they begin entering what have traditionally been known as the retirement years. Most advisors are now beginning to ask the question, “retiring to what?” Do clients plan to pursue retirement activities for which they have a latent or dormant passion? Will clients be able to live off the assets they’ve accumulated, or will they need to continue to work? How long will those assets last if they are no longer contributing to principal? Are they emotionally ready for the transition?
While the questions for today’s retiring clients are now becoming intuitively obvious, advisors who have focused on the pre-retiree and retiree markets for the past 10 years or so will need to reflect on what will happen to their own financial position over the next five to 15 years now that boomers are once again threatening to change our economy and our culture.
Some argue that there are veins of gold in 401(k) rollovers and the conversion of illiquid assets like real estate and small businesses into cash, creating a dramatic spike in income for advisors. Others caution that the voracious appetite of baby boomers to feed their own lifestyles, and our extended lifespans due to better healthcare and expensive life-sustaining treatments, will rip away principle from portfolios faster than you can say “rollover.”
Whatever your assumptions about the risk or opportunity, advisors who are serving this baby boomer market (which is the majority of financial advisors) need to assess whether their practices are prepared. If you buy the liquidity argument, then do you have the physical capacity to handle more client relationships? If you buy the distribution vs. accumulation argument, then do you have the pricing strategy in place as well as the time for clients who will require more planning but who will be reducing the fees paid to you based on their assets under management?
The major consulting firm McKinsey & Co. estimated that almost 60% of all clients have changed advisors at least once in the 15 years leading up to retirement, with many having changed advisors two or more times. The VIP Forum, in its 2005 report, Coming of Age: Best Practices for Serving Affluent Pre-Retirees and Retirees, observed that 23% of retirees over age 60 expressed a willingness to listen to another advisor’s pitch, and 13% of these folks switched advisors in the past 12 months.
The reasons for this lack of loyalty appear to be tied to a gap in perception between client and advisor. Most advisors will ask, “What’s different? I’ve been working with retirement portfolios for years.” Meanwhile, clients are saying that they are not sure the advisor they relied on in the accumulation phase has the necessary skill set to help them manage through the distribution phase.
The competitive threat to advisors with pre-retiree clients comes from outside the independent advisor community as well. Many clients also work with insurance agents, CPAs, attorneys, and bankers who also covet deeper relationships with those clients once they become liquid.
According to a survey done by The Tiburon Group (The Future of Advice 2005), clients with $1 million to $5 million of net worth have on average three professional advisor relationships, and those with $5 million to $10 million have more than 4 professionals. If there are roll-overs to be had, or private accounts to be managed (depending on whether the current administration has the political muscle to make this happen), or other opportunities to convert those assets into fees, the marketing push by the competitors will be on big time.
This competitive threat has caused one broker/dealer, Commonwealth Financial Network to do some reengineering inside their firm to help their advisors be better prepared. For example, they are creating a model “distribution policy statement” as a replacement for the investment policy statement for clients who enter into the portfolio depletion mode. Commonwealth has committed substantial resources to training both internal staff and advisors on processes and products that match up well with boomers; and they have also begun to develop marketing tools to help their advisors be better positioned for clients and prospects who are within this demographic.
The fundamental shift from “retirement planning” to “retired” planning will be a challenge for advisors who have always focused on continued growth. There are at least four areas in which advisors should examine their preparedness for the changes in their client base:
1. The value proposition
2. Pricing strategy
3. Relationship with clients and their successors
4. Succession and practice continuity
The Value Proposition