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The $20 Trillion Question

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Twenty trillion dollars is roughly the amount of money that retirees in coming years will be drawing down; but no one has figured out the best ways financial advisors can help them do that.

As Francois Gadenne, founding chairman of the Retirement Income Industry Association, frames it: “Advisors are sitting between chairs. Try it. It doesn’t work very well. We are at the point in our industry, in our businesses, when the ground is shifting under us.” [See profile of Gadenne on page TK.]

Gadenne, speaking at RIIA’s annual meeting and awards dinner in Cambridge, Mass., in September, didn’t mince words.

“Think evolution. Think adaptation. Think new ideas,” he told the audience, which included, among others, advisors, plan sponsors, product manufacturers, academics, researchers and technology providers. “What are the strategies outside the single big bet in your silos? That’s where the solutions lie.”

The shift from asset accumulation to income distribution comes with huge stakes — for just about everyone.

But, as Rick Miller, who heads Sensible Financial Planning in Cambridge, notes: “Academic consensus has yet to emerge. Advisors are still flailing about. Product solutions are incomplete. Our clients are confused — and they are terrified about this.”

New research from Financial Research Corp. indicates that 75 percent of firms sampled would like to have a retirement income methodology “at some point” that addresses the question: How do I generate income in retirement off of the assets I have accumulated?

The research study, “Building & Positioning Retirement Income Solutions,” also compares the attitudes of 30 respondents, representing $15 trillion in assets, on product development opportunities. The results of the study, some of which were previewed at RIIA’s conference, are telling.

In 2005, 44 percent of firms said they were working on developing non-insurance approaches that guarantee income. By 2007, the number had jumped to 71 percent. A hike was also registered with firms focusing on principal-protection products, 67 percent to 83 percent. Likewise, there was a spike in the development of automated processes for mutual funds with planned distribution: 67 percent to 85 percent.

While the retirement income market stands at just $2 trillion today, Financial Research Corp. research partner Laura Varas estimates it could amount to as much as $7 trillion, or 30 percent of U.S. household investable assets, 15 years from now.

“This is akin to the early days of the 401(k) when you were counting sponsors on one hand,” said Varas. “It’s early, yes, but a lot of advisors are already tackling this. As often happens, the people in the field are kind of the first to know. What I do hear advisors saying is they don’t want to be pitched on a fund, even if you name it the “Retirees’ Diversified Income Fund.” It could be part of the solution, but the big idea is to have a planning process that hopefully doesn’t take too much time that answers the question: How does the customer draw down his assets? That’s where the leading thinking has to take place.”

Advisors Sound OffWhen strategic marketing consultant and RIIA board member David Macchia, CEO of Wealth2K, introduced certified financial planners Phil Lubinski and Briggs Matsko at the conference, he called them “income pioneers” whose clarity of ideas and tested income-distribution methodologies have resulted in clients who can say with confidence: “Just take care of me.”

But, Macchia added: “That’s just not practical for 97 percent of advisors today.”

The two advisors have differing methodologies: Simply put, Lubinski’s Income for Life Model is a segmented asset-class strategy that places a heavy emphasis on guaranteed streams of income that continue over long periods of time. Matsko’s pyramid-shaped Retirement Income Matrix links particular funding sources to particular expenses.

Notably, both Lubinski and Matsko said that while industry leaders are talking about building multiple, process-driven solutions, that is not the message they are hearing from wholesalers in the field.

“What the CEOs are saying is that they understand that no one of them has a single solution to retirement income, but that collectively they do. Yet their wholesalers are basically coming into advisors’ offices with a single solution: ‘Here’s my deal and here’s why my rider is better than their rider.’ Frankly, they’re not bringing anything other than product features and they all look alike,” says Lubinski, who heads First Financial Strategies in Denver. “We don’t need product features; we need strategic solutions.”

Lubinski, in fact, is calling for a dramatic change in the wholesaler/advisor relationship.

“We’ve got to get away from the product relationship to a business partner relationship. It needs to be consultative,” he says. “Unfortunately, it’s talked about in theory, but no one has taken the first step.”

Matsko, who has a large practice with Lincoln Financial Advisors in Sacramento, says the fundamental problem is that manufacturers have typically produced products that clients are expected to adapt to — rather than creating a process-driven approach where the product adapts to the client.

“If I’m doing the right job, I’m really running you through the process, and that process may or may not include a product sale,” says Matsko. “There’s just this huge disconnect between manufacturers and the soldiers in the trenches.”

Hopefully, manufacturers are listening.

At the moment, however, only 25 percent of advisors believe product providers are doing a good job helping them with effective retirement-planning tools and products, according to an advisor attitude survey released at the conference.

As RIIA membership co-chair Elmer Rich, principal of Chicago-based strategic marketing advisor Rich & Co., put it: “Financial advisors are saying they don’t want more product. We’re seeing….resistance. There’s a lot of impatience and discouragement with what they’re getting from wholesalers. They’re getting products that are thrown out, not thought out — and there’s no educational component involved. They’re saying don’t bring me any more poor products.”

A Look AheadIt’s been called a “war,” a “battle,” even an “arms race” — and one thing is certain: The contest for winning retirement income solutions is going to be crowded and competitive.

“We’re at the front edge of the demand for retirement income products, simply based on demographics. But you can bet there are people out there in their product labs who are thinking about all this right now,” notes Bob Padgette, managing director of Klein Decisions, a Raleigh, N.C.-based software company that develops financial-decision tools. “I think all of our traditional thinking about an income product will have changed significantly five years from now. Advisors are really going to need resources that can help them adjust their business model to one that deals more with distribution-type issues and distribution-type investments.”

Among the solutions that are likely to emerge: risk-sharing products that don’t now exist; new web-based technology that will do real-time modeling under different assumptions; lower-cost structured products that may have future “guaranteed” income; new technology that addresses the self-advice channel; and products that combine insurance with investments that allow participation in the upside.

“We’re still in the early stages of it, but we’ll see tremendous acceleration and innovation over the next three to five years. It’s all about new product development, new technology and a big part is going to be communications. Effective communications will be every bit as important as product,” according to Macchia.

Notably, the Financial Research Corp. study shows 43 percent of firms surveyed in 2007 reported they had added staff to focus on retirement income planning products and services, as opposed to just 17 percent in 2005.

Last fall, as an example, Lincoln Financial Group launched its Retirement Income Securities Ventures unit, headed by Heather Dzielak, a well-known retirement income security strategist. The unit was staffed this past May. Today, it has 15 employees, including a director of innovation.

Dzielak says the retirement income solution has to start with the consumer.

“There’s this arms race going on amongst product manufacturers without recognition of what it really means to the consumer. We need to stop competing amongst ourselves and start thinking about what really matters to the consumer,” she says.

As for the advisor, she adds: “It doesn’t have to be about switching your practice. There are still a lot of people who need accumulation. Think of this as a way to extend your practice. Your clients just want to feel comfortable that they were taken through a process that gives them confidence that it’s going to be OK in retirement. It can’t be a one and done… Advice needs to drive the product sale.”

Adds Macchia: “When you get to income distribution, the stakes are too high for any mistakes. People will require confidence not only in the financial advisor, which was adequate in accumulation, but confidence in the solution itself. The delivery of confidence is not exclusively a function of communication but, in large part, it’s a function of well-conceived communication.”

Next year, Lincoln Financial Group will pilot a sales process on retirement income distribution planning that will help the advisor drive through a series of client questions and conduct a product-allocation analysis along with subsequent recommendations.

With people living longer, the rising cost of health care, the disappearance of private pensions and higher lifestyle expectations, RIIA presenter Mathew Greenwald, head of the research and consulting company, Mathew Greenwald & Associates Greenwald, concludes there is no alternative to change.

“Right now, we have retirement income planning methods that are not efficient,” he says. “The current generation of risk-sharing products just isn’t good enough. If things don’t change, a lot of people will end their life in deprivation. We’re just at the start of the problem. We’re also just at the start of the solution.”

The Retirement Income Industry Association inaugurated its first awards ceremony in order to get people talking about innovation, excellence and leadership.

As RIIA communications chair David Macchia noted, “At the highest level, the contest over boomer retirement assets is really a contest over communications. Financial services companies are going to have to convey their value to a large and fluid audience of consumers and they’re going to have to properly differentiate themselves and create confidence and clarity. Their success really to a large extent depends on them being able to carry this out.”

Dozens of entries were received — and the winners were:

Prof. Zvi Bodie of Boston University received the first-ever award for Lifetime Achievement in Applied Retirement Research. “Professor Bodie’s contributions to retirement research have benefited generations of business leaders, financial services industry executives, and average American investors and retirees alike. That’s a unique and extraordinary achievement,” said Research editor Gil Weinreich, who presented the award. “His influence spans far beyond academia to the retirement income industry’s lifecycle investing trend. Helping anyone understand a subject that can be, at times, very complex is clearly a lifelong mission for Professor Bodie.” [For more on Prof. Bodie, see our Lunch with Research column on page 85].

Nationwide Financial took the Retirement Income Advertising Award for its Life Comes At You Fast campaign of TV ads. “The videos make a dramatic impression, the Nationwide theme really hits home and it leverages popular culture,” Macchia said. How else to explain rapper [and Britney Spears' ex-husband] Kevin Federline doing his take on the jingle, “Nationwide is on your side?”

Morningstar won the Retail Retirement Income Communications Award for its new media entry, a Power Point presentation it uses as part of its Principia Presentations & Education module to support clients through meetings, seminars and training sessions.

Columbia Management Group won a Retail Retirement Income Communications Award in the printed materials category for an educational series and training program in which it partnered with the Retirement Learning Center.

Lincoln Financial Group won the Defined Contributions Advisor Award for its Be a Know-It-All i4LIFE Advantage campaign. Nick Platt, chief operating officer of PLANSPONSOR, a media and information company in the institutional space, chaired the committee that selected the award-winning campaign, a package for financial advisors that includes print and electronic material, a brochure, an advisor/client Power Point presentation, a seminar invitation, an advisor/client interactive postcard, statement stuffers, a client prospecting letter and advisor e-communications and flash presentation. “In our judgment, the overall package was comprehensive, well-organized and turnkey. Materials were pleasantly designed, engaging and easy to understand,” Platt said. “Retirement income is quite a complicated product. For anybody who has to convey that message, it’s quite a considerable challenge.”

Genworth Financial took the Defined Contributions Plan Participant Award for its Clear Course Personalized URLs, a customized CD that an advisor sends to retirement plan participants. “As far as we can tell, nobody else is doing this. The fact that it is in an electronic format and personalized we considered to be innovative and groundbreaking,” according to Platt. “It’s also a way to engage participants in retirement income planning without needing to orchestrate in-person meetings.”

Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at [email protected]

Editor’s note: Research was the lead media sponsor of the RIIA conference. To view presentations from the conference online, visit