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.”
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.