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The Longevity Race

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Perfectionists, but in a good way, is how Paul Lofties might describe the advisors he manages at Securities America. After installing the retirement distribution tool, “Income for Life” from software maker Wealth2k, the advisors at the Omaha-based broker/dealer played with it for a year or so, and then decided they wanted more. They wanted a way to gauge their clients’ feelings.

“This is the most important thing philosophically in terms of distribution coverage,” says Lofties, the firm’s vice president, wealth management services. “How do you decide how much income needs to be guaranteed and how much invested in the market? We did a white paper that showed an optimum return through the market. But if we ask clients what’s important to them emotionally? It’s guaranteeing they don’t run out of money.”

Integrating an emotional X-factor into a software tool is not exactly the domain of programmers. So Securities America drafted a questionnaire, tagged “Reliability of Income,” which creates guidance so advisors can read the comfort level of their clients and how those clients want their money seeded during their later years. Are they interested in guaranteed income streams such as annuities, or the market?

Wealth2k, based in Hingham, Massachusetts, embedded the questionnaire into “Income for Life,” and the new version was distributed to Securities America’s 1,800 advisors this fall, re-branded as part of its NextPhase distribution tools. “Now we can see what’s emotionally important to them,” says Lofties.

As clients live longer, finding the right products to help extend assets throughout an investor’s lifespan is critical. But consensus between advisor and client can be hard to reach. While many clients believe that annuities are the safest road, advisors may feel that with a 30-year retirement ahead of them, the market may be a better place for their investments, at least for the first few years.

Never has retirement distribution planning been more critical, especially as baby boomers have started to cross into their golden years. Software makers including EISI, SunGard, Morningstar, and Wealth2k, are developing products that not only look at the best way to maintain accumulated wealth, but how to deplete it safely–in a way upon which the client and advisor agree. “Advisors are interested in retaining clients and expressing to clients that they have the expertise to keep them,” says Mike Barad, Morningstar’s vice president of financial communications in Chicago. “So we need to arm them with appropriate tools. If they don’t show expertise, other advisors will.”

All in The Timing

Wealth2k’s approach has always been centered on timing. “Income for Life” divides an investor’s projected retirement years into six five-year segments, and then creates investment strategies for each piece. Instead of systematic withdrawals over 30 years, investments for those first few years may be invested more conservatively so there’s immediate income, and those accounts set aside for the later years are put into the market so they can grow.

While advisors agree that interest in annuities options is growing, because they promise a steady stream of income for a set period of time, advisors also worry that anxious clients will try and invest an unhealthy portion of their assets in these options.

“Income for Life” actually acts as a stopgap on annuity dependency, by putting limits into the portion that can be set aside. In Securities America’s case, guaranteed investments are capped at 50% because of the firm’s concern of their high-cost, and because it believes annuities have a low likelihood of inflation income.

Wealth2k also prides itself on making its plan easy to follow for both clients and advisors. Wealth2k’s founder and CEO, David Macchia designed “Income for Life” and its add-ons with not just good planning in mind–but strong presentation as well.

Every advisor who uses Wealth2k tools, gets a micro Web site where his clients can log in and view materials on how this time segment investment strategy works. The client is then armed with enough information that he can sit with an advisor and distill the distribution plan crafted for him.

“This is a high-stakes war not just of product but of confidence,” he says. “The winner is the one who can create confidence in the mind of the consumer. You have to make people comfortable with their choices.”

Mining the Details

Gregory Kolojeski has a head for numbers–and yet also knows how to crunch them into an easily digested package for both investors and advisors.

After a span at the Internal Revenue Service (IRS) calculating figures in the estate planning area, Brentmark Software’s president and founder came to the conclusion that advisors would buy software that could run algorithms that applied to rules affecting an investor’s investments in their later years.

After hiring programmers, the Orlando, Florida-based Kolojeski launched his first product in the late 1980s, which 22 years later has morphed into a cadre of tools that includes its Retirement Plan Analyzer (RPA). The software not only analyzes retirement plans but can also chew through spousal rules, estate tax projections, and required distributions, display them over four different track patterns, and then illustrate the behavioral problems that each investment strategy brings so that advisors and investors can find the best, most tax-efficient, financial solution.

For example, while the IRS may state that an investor has to take his first distribution from an Individual Retirement Account (IRA) no later than age 701?,,2, that may actually depend on the beneficiaries named for that account, says Jane Schuck, Brentmark’s director of sales and marketing. “We model the regulatory rules and then you make decisions for distribution based on other factors in your life,” she says. “So you model for your client based on their lifestyle needs.”

Dovetailed with RPA is, what Schuck calls the tool’s baby brother, the Retirement Distributions Planner (RDP). Essentially a calculator, RDP acts as the real workhorse of the two, crunching numbers, and determining the minimum distribution from an IRA, for example.

Like Wealth2k’s Macchia, Kolojeski also understands that advisors are clamoring not just for easier tools for themselves, but also simpler reports for their clients. “Customers are not shy about telling you what they want,” he says. “And going forward we’re going to focus on presentation even more, reports that you would generate for yourself internally, and then the types you would give to your client.”

Modeling Reality

Morningstar knows well how competition among software makers on the distribution side has quickly grown as advisors seek out new tools to help calculate and illustrate the longevity of a client’s retirement assets. “Product development is very fierce,” says Morningstar’s Barad.

However the company also believes it has a secret weapon locked in its newest product, the Retirement Income Strategist (RIS), which looks at the years immediately preceding retirement, and after, to calculate asset flow for clients. Like other retirement distribution tools, RIS models cash flow. “But instead of looking at it as three or so different phases, the software treats retirement as a series of assumptions year by year,” says Barad.

Advisors are encouraged to run the tool every 12 months and adjust investments accordingly. By developing the tool for use in the years before retirement, Barad hopes that advisors can help shift client’s expectations. For example, if it appears that financial goals aren’t going to be met, investors can look at other options such as delaying retirement or continuing to work part-time.

A second product, the Retirement Income Education Center (RIEC), gives more of a snapshot of what’s ahead on a client’s retirement horizon. The software creates presentation materials that show a projected income path during retirement years based on current investment decisions. Morningstar imagines an advisor starting with RIEC as an educational tool to “get everyone on the same page on the language of risk,” says Barad. Then an advisor can sharpen his virtual pencils, and create a more detailed plan with RIS.

The release of RIS came just after Morningstar acquired Ibbotson Associates, the research and asset allocation firm known for its robust wealth-forecasting tool and proprietary Monte Carlo engine, in 2006, says Barad. “We brought [the engine] into the platform and got it to the market quickly,” he says.

Barad likes to tout the excellence of the Ibbotson engine and its unique way, he says, of calculating forecasts. While other engines, he says, take historical numbers to create a plan, RIS uses forward and historical data to generate a bell curve, or a parametric simulation. That’s added to an econometric simulation, which models inflation data. The combination of these two is Morningstar’s so-called killer app, believes Barad. “It’s time tested,” he says.

However, the true test, as Barad well knows, will come as baby boomers rush towards their retirement years, and find that their assets–carefully tended by their advisors–do hold. Advisors too have yet to settle into the software tool they believe offers them the easiest way to present, calculate, and convince investors. Which is why Barad says Morningstar will devote about 30-40% of its time continuing to build retirement related products and content. “Folks aren’t quite sure what they want to use,” says Barad. “And it’s the financial services industry who is determining who will represent the retirement market.”

The Rise of Annuities

As Brent Grimm thumbed through academic papers earlier this year, he read experts stating that smart investors should invest portfolios into guaranteed investments. “Of course that meant annuities,” says the director of retirement planning at Salt Lake City-based SunGard. “So we wanted a planner to be able to illustrate the likelihood an investor would meet their distribution needs, depending on different sets of assumptions, such as investments in annuities. We also take into account other factors like reverse mortgages.”

SunGard’s latest version of its popular “At Retirement” module, part of its new retirement solution called RISE, includes these options, along with the ability to allow advisors to factor other variables like changing retirement dates, or alter spending patterns to ensure a client will still reach his financial goals if he lives to be 80, 90 and even 100. “What’s complicating this whole area of retirement distribution is extended life expectancy,” says John Deglow, senior vice president and director of wealth strategies at Hilliard Lyons in Louisville, Kentucky. “What you planned for 20 years ago may have to be reviewed.”

Hilliard Lyons, a long-time SunGard client, rolled out RISE to its 400 advisors this fall, knowing that advisors and clients may value the use of annuities in meeting distribution goals over time. “Outliving my income? That’s the fear,” says Deglow. “And I see that annuities will be a popular item again.”

While RISE comes with a library of annuity products and costs installed in its software, advisors can input their own data, or override those options and plug in their own preferred products. The key to this competitive landscape, SunGard’s Grimm believes, is staying ahead of the curve–even offering options that advisors may not realize they need. “We’re going to keep moving forward,” says Grimm. “And we’ll pull the planner ahead with us as we go.”

Road Map to Retirement

J. Maxey Sanderson, vice president of product development with Charlotte, North Carolina-based Impact Technologies understands well who clearly sits in the driver’s seat in terms of creating a workable retirement distribution plan. “Typically the product results are controlled less by an advisor, and more with what clients are comfortable with,” he says. “We try to design the products so that the advisor can give them meaningful answers.”

Key to this process are Impact’s two products, the Retirement Road Map (RRM), released about two years ago, and the Retirement Test Drive (RTD), which came out this summer, both meant for use in much the same way as they sound.

Starting with RRM, advisors create a road map by answering investors’ basic questions like, “How much will I need when I retire?” and “Do I have enough?” “Typical baby boomer questions,” says Sanderson.

After plugging numbers into RRM, the software begins to break down the retirement years in phases–creating a rough investment and distribution strategy. Then the advisor switches to RTD, crafting a more detailed plan that covers the specific investment challenges for each phase–traveling, health factors, and even the survivorship years when one spouse dies, and the other lives. “The road map shows me where I am headed,” says Sanderson. “But along the test drive I can start to shift around my plan to see what actually works best with my specific decisions.” A tool once available solely to financial institutions including MetLife and New York Life, Impact started offering the products on the Web to single advisors this summer. “Now with both products, advisors can help clients plan their retirement all the way through,”he notes.

Dual Options

With two different, and slightly competing, products under EISI’s belt, advisors may have a hard time delineating and choosing.

But between NaviPlan and Profiles, it’s the latter that sports the firm’s most recent upgrade by reworking the way it handled assets and holdings, says Gregg Janes, the Carlsbad, California-based vice president, product management-planning of EISI.

One new change shifted the way Profiles reinvested surplus income that could accumulate in a year. The program would automatically deposit that surplus back into an investor’s accounts. “It didn’t allow people to spend that surplus income,” says Janes. “But now they can.”

Profiles also upgraded its risk questionnaire to include questions not just about a client’s short-term goals during his retirement years, but long-term goals as well. And the program now automatically rebalances portfolios, selling off stocks or bonds to make sure allocations stay the same as investments grow.

What’s still missing–but available in NaviPlan–is the ability to factor and illustrate various retirement scenarios that are predefined, such as choosing the results of pairing a specific retirement age with a certain inflation rate. But Profiles will have this available on its next upgrade, says Janes.

While EISI has every intention of keeping both Profiles and NaviPlan as separate products for now, the company also intends to have each contain the best of the other, especially as demand grows for retirement distribution products, says Linda Strachan, the Winnipeg, Manitoba-based vice president of product marketing in Canada.

While retirees have always needed to focus on ensuring that their assets would last as long as they did, the growing number of retirees coupled with their longer, and much more active life spans, has clearly put many of these distribution tools to the test.

And some boomers are now facing retirement years that will come close to lasting as long as their working years– requiring a distribution plan as detailed as the one an advisor probably created for their original retirement strategy.

As software makers continue to upgrade products, and develop stand-alone tools that focus solely on these distribution needs, advisors will keep shopping around until they find one that not only generates as many scenarios as possible, but also one that their clients will be able to understand, and trust.

Telling a client in their mid-40s that they may have to hunker down and save more each month is one thing. Telling them in their mid-80s, while they’re still playing golf each morning, that they may have to move in with their grown children is another. “You can make a mistake in accumulation, because you can make it up,” says Wealth2k’s Macchia. “But make a mistake in distribution and your client is going to run out of money.”

Lauren Barack is a New York-based freelance business writer who specializes in stories on technology, finance, and parenting. She can be reached at [email protected].


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