For the last few decades, financial advisors have gotten to be very good at wealth accumulation. It’s what you do. It’s where you live. But guess what? Your job description is about to change — a shift fraught with challenge and opportunity.
With baby boomers marching into retirement, the conversation today, and for years to come, will focus on retirement income distribution planning. It’s a strange new landscape for both advisors and firms who are only now beginning to develop products, solutions, even a vocabulary to wrap them in.
As Kevin Hart, president of Sun Life Financial Distributors, puts it: “An evolution in the advisory business is occurring right now; it’s undeniable. It’s clear from research that Americans really want to engage in conversation about distribution and income, yet most advisors are still focusing on accumulation. For a lot of people, this is a brand new language. The whole industry is challenging itself to get in front of this.”
It looks like a pretty tough learning curve.
“The conversation has to change from alpha hunting to risk management, withdrawals and spending,” notes Moshe Milevsky, a finance professor at York University in Toronto and one of the world’s leading authorities on retirement-related finance issues (and monthly contributor to Research). “It’s almost as if advisors have to relearn finance from the beginning. Instruments and strategies that made absolutely no sense when accumulating wealth suddenly make sense.”
With life spans lengthening and pension plans drying up, the situation has led to a rethinking of strategies and solutions as companies search for the new holy grail in longevity protection: the personal pension.
“It’s all going to be structured around lifetime income with guarantees that keep up with the cost of living. Everyone is going to be trying to replicate the defined benefit pension,” says Milevsky. “If it looks and smells and feels like a pension, it’s going to make sense to people.”
Experts say muni bonds, laddered bond portfolios, real estate investment trusts and high-dividend paying stocks will likely be nudged from prominence by a host of other emerging products. Among them: new and improved annuities, structured investments and combination products that mitigate more than one risk [life insurance and long-term care insurance, as an example.]
The non-profit Retirement Income Industry Association, just over a year old, also reports that it’s possible, and perhaps probable, that new business models will emerge over the next few years.
“There’s a great deal of intensive study going on in all manner of organizations and they are being faced with a major decision: Do they want to make small and incremental changes to the business model or will a new business model be required to exploit this opportunity? You could argue that you will need new ones to exploit it fully,” according to David Macchia, an RIIA director and president and CEO of Wealth2K, a financial services marketing organization.
Dan Veto, senior vice president of the think tank, Age Wave, believes the transition to retirement income distribution represents a “fundamental change in the job of the advisor.” In fact, Age Wave in March launched Retirement Bridge, a web-based tool designed to help advisors have more meaningful conversations with clients about retirement income planning. Among those first to sign up: LPL Financial Advisors, HSBC Bank and Thrivent Financial for Lutherans.
Veto says the shift to retirement income distribution represents a challenge not only in product knowledge, but in compensation and the client relationship itself.
“This is not a trivial transformation. In the wealth accumulation phase, advisors are paid to grow assets under management. This notion that I’m going to work with a client to decrease their assets goes against their very nature. In many cases, there are negative compensation consequences,” Veto notes. “Someone needs to crack the code on how to properly incent advisors.”
Meanwhile, as a result of baby boomers redefining retirement, the advisor-client relationship is due for change.
“This life stage today is so incredibly complex. The notion of opening a 529 for someone who’s 50 may be a legitimate product to consider. It’s just very difficult to wrap your head around. Retirement distribution planning, if you really do it well, means that the conversation you’re going to have with a client at 9:30 will likely be very different from the appointment you have at 2:30. And that’s tough,” Veto says.
“Any advisor will be well served to at least have a fundamental knowledge of different products outside their own asset accumulation sweet spot. There’s enormous risk — and opportunity,” he adds. “Those that can figure it out will do tremendously well. For those that don’t, it won’t be long before they’re fading into the distance.”
Not surprisingly, the insurance industry is out front with the first generation of revised income-guaranteed product solutions. Fees are becoming more transparent and, in some cases, cheaper. There are immediate annuities that now pay advisors a trail. And, responding to the needs of baby boomers for more flexible annuity income, annuities are being re-engineered.
Sun Life Financial, for example, in March introduced Income ON Demand, the industry’s first-ever income storage benefit. The option combines the availability of annual withdrawals with the flexibility to store that income for future use.
Lynne Ford, who directs the retail arm of Wachovia Securities’ retirement planning group, calls the shift to retirement income distribution “the single biggest opportunity out there in decades.”
According to industry research, only 20 percent of advisors routinely use annuities, a statistic that Ford and many others expect to trend upward as companies produce annuities that are more market-friendly.