Research: What’s your take on the looming shift from accumulation to distribution?
Macchia: It’s as real as anything can be. There’s no denying that demographics is driving the shift from accumulation to income generation and that the scale of the transition, in both population and dollar terms, is unmatched in history. We’re talking about $20 trillion shifting to income generation, which will need to be spread out over retirements lasting decades more than previous generations experienced.
How can the industry serve this huge market?
There are many challenges. The No. 1 challenge, in my judgment, may surprise you. It’s communications. In the not-too-distant future, we’ll be facing the need to compliantly communicate with tens of millions of individuals who will be requiring distribution planning guidance at the same time that as many as 50 percent of today’s financial advisors will be retiring. This is a very significant challenge, and solving it will require an innovative combination of web-based technology, compliant educational content and engaging web-browser experiences. We’re going to have to use web-based technology wisely to help advisors interact with many more prospects, or we’re gong to miss out on lots of future business opportunities.
So technology is the answer?
At the very least, it will be a great determinant of success or failure. I see an ongoing revolution in communications strategies leading to significant reliance on web-based strategies — but putting the advisor in the central role. For years following the recognition of the Internet, these technologies really led in the financial services industry to paranoia: Advisors were going to be disintermediated. In fact, the future will bring clients and prospects to advisors in ways that would have been unimaginable. The advisor’s capabilities will be expanded exponentially.
How can an individual advisor get a piece of the action?
First, by recognizing the magnitude of the business opportunity and then by embracing an approach to creating durable inflation-adjusted retirement income. There will be many approaches to choose from; you can make the analogy to various religions. Some will align with product answers, some with comprehensive solutions that embrace multiple products. Some will opt to join the religion of systematic withdrawal plans. Still others, the religion of laddered asset strategies.
What happens to the accumulation business?
Of course, the younger people coming behind the retiring boomers are still going to need solutions for accumulating their retirement assets. The boomers to a large degree are going to pioneer the distribution strategies that will eventually help those coming up behind them move their money into a retirement income mode. And accumulation will remain a relevant perspective for boomers in retirement because in order to reach the goal of having retirement income that increases ahead of inflation, ongoing participation in equity markets becomes critically important. There is and will be an ongoing accumulation dimension in distribution strategies and products in order to accommodate this objective.
Are these products coming online now?
There are multiple ways advisors can prepare. For instance, Wealth2k (wealth2k.com) has moved aggressively to bring to market a solution we call The Income for Life Model. This is an open-architecture program which uses time-weighted asset allocation combined with strategic product recommendations. The Income for Life Model can put an advisor in the business of income distribution quickly and with a proven approach. While I believe our solution has many competitive advantages (including advantages in its associated marketing tools and strategies), I also recognize that there will be many competitors. In fact, we’re building some of these as private-label solutions for large broker-dealers and insurance companies. As a consultancy, Wealth2k is not wedded to any single approach, and we recognize that there will be many new products and solutions seeking their fair share of the total income market.
How important will fixed annuities be?
I’m very bullish about the role of fixed annuities in distribution. One of the economic attributes of the distribution phase is that there are a couple of critical time spans — 10 years immediately preceding retirement and 10 years immediately following retirement. In that 20-year phase, protecting the principal while having ongoing growth potential is arguably the most important objective. In the eight to 10 years immediately preceding retirement, assets grow typically 50 percent, while there’s a transition from a psychological state that might have been called “risk averse” to one that’s clearly more “loss” averse. A loss in those years may lead to a lifelong diminishment of retirement income, so it’s very important to protect those assets. Likewise, in the first years following retirement, any investment losses should get people thinking that there’s a high probability they’ll outlive their retirement assets. Fixed annuities are very important to safeguard that accumulated investment principal. The guarantees of a variable annuity are conditional; the guarantees of a fixed annuity are absolute.
What are advisors still doing wrong?
One tactical mistake that makes me cringe every time I see it is the mistake of projecting too high an income stream from a withdrawal plan. Normal market downturns are a fact of life, and it’s a simple truth that investment losses in the first few years following retirement create a 70 percent to 80 percent correlation to total portfolio ruin. No advisor wants to place a client in that situation. That this risk is so real leads me to believe that laddered strategies (which mix fixed-income products in the near-term ladders with more aggressive growth positions in the long-term ladders) will achieve a significant market share. Laddered strategies help mitigate the risk.
What’s the best thing to tell someone approaching retirement?
Assess the true income generation capacity of your retirement assets and then seek out an advisor who has made a serious commitment to income planning. An advisor with the right training and insights is virtually indispensable to the majority of clients who, by definition, will be challenged to create durable retirement income.