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Retirement Planning > Saving for Retirement

Chief Risk Officer

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With retirement shaping up as the New Frontier, advisors are being forced to rethink client risk — and mitigate that risk as never before. It’s uncharted territory that has industry thought leaders challenging long-held assumptions and searching, basically, for a map.

One certain outcome: a new and expanded role for the advisor.

As Moshe Milevsky, who teaches retirement income planning and risk management at York University in Toronto, puts it: “Whether you’re a registered investment advisor or a stockbroker, you will have to transition from wealth and investment manager to risk manager. You are going to become your client’s CRO, chief risk officer. The risks you manage will be more than monetary but health risks, long-term care, estate-planning issues. As uncomfortable as this might be, you’re going to have to learn about Alzheimer’s and Medicare. You simply won’t survive if you stick to your knitting.”

With the oldest of the nation’s 78 million baby boomers turning 62 this year, advisors are already being put on notice. Adding an edge to the unfolding story: the uncertain economic climate.

“The next few months are going to be pretty telling,” according to Cerulli Associates associate director Bing Waldert, who describes today’s retirement income strategies such as dividend-paying stocks, fixed-income securities and laddered bond portfolios as “fairly simplistic.” Rather, he says, advisors need to embrace holistic planning with its broad reach.

“If we go into a bear market and retirees are forced to go back to work because they’re spending down assets too quickly, a lot of advisors are going to have to rethink the way they do business,” says Waldert. “In terms of new strategies, you are beginning to see them in the very early stages of development. We are on the edge of something new in how we structure retirement. It’s coming.”

In addition to emerging products that guarantee an income stream, new planning models are being created that assume retirees will earn some income as consultants or in part-time endeavors; others are likely to factor in varying spending patterns during different periods in retirement. One longstanding industry yardstick — the 70 percent income replacement ratio — is under fire. Correction: It’s been blown up. And the industry is abuzz over this critical question: What constitutes a safe withdrawal rate?

Wachovia Corp.’s fourth annual Retirement Fitness Survey of 2,100 consumers nationwide showed that 28 percent of respondents were drawing down 10 percent or more of their assets on an annual basis. Four percent is the rule of thumb. The survey, released in April, also said that only 9 percent of respondents had delayed taking Social Security beyond age 62.

“I’m surprised by it,” Lynne Ford, senior vice president and director of Wachovia Corp.’s retail retirement group, said about the result concerning the drawdown rate. “I’m also scared by it. Obviously, education here is needed.”

Industry observers say robust academic investigation into appropriate withdrawal rates has only just begun.

It can’t come soon enough.

Ford, who speaks frequently to groups about longevity issues, offers this chilling anecdote: “I’ve stood in front of many adults and asked them: If you have a husband and wife, age 65, in good health and neither smokes or has a disease, what is the age of the second to die? I consistently get 75 or 80. The answer is 85 on average. The thing is: If you’re 65 and you can’t imagine a 20- or 30-year retirement, how can you plan for it? How can you plan for something you can’t even imagine?”

Educating the AdvisorIt’s not just the client who needs educating — it’s the advisor.

And there seems to be widespread agreement that any training emphasis on risk management has been sorely missing.

“Advisors haven’t been trained to rethink risk. What advisors are trained to do is manage market risk. Some of them are very, very good at that, but there are other risks now that need to be addressed: death, disability, longevity. You have to at least have a discussion with the client about these risks, how to measure them, which products to buy. That’s where the void is,” according to Philip G. Lubinski, an advisor with First Financial Strategies in Denver.

“I think the industry, all the players, abandoned training back in the early ’90s and turned it over to the wholesalers. Unfortunately, the wholesalers’ training is skewed to the product they represent. It’s not objective,” says Lubinski, whose time-segmented Income For Life retirement income distribution model is now being used by 3,000 advisors. “You’re not going to see a change until the public demands it. We’ve got to inform the public that this is what they need to demand of their advisor. It’s kind of a sad statement, isn’t it?”

Dan Veto, senior vice president for the think tank, Age Wave, says the financial services industry — long rooted in models and returns — hasn’t yet grappled in any meaningful way with retirement’s new risks.

“Some advisors aren’t even fundamentally aware of them, and don’t have the products or tools yet to manage them. What we’re moving to is a self-insured model,” he says. “We have barely scratched the surface. We’re probably at the top of the second inning. Firms are going to push the frontier on things like: How do we build the proper models? How do we build the products that assume these risks?”

Veto’s best advice for advisors? “You really need to become a student of this. You have your ways of doing business and they have worked in the past, but the context around you is changing dramatically and quickly. Don’t be close-minded to new product twists. Don’t be close-minded to annuities. It’s OK to be critical — and there will be an industry dialogue around these things. But you have to become students of new approaches,” he adds. “This stuff is going to be coming at you fast and furious.”

One of the most important issues to track: the evolving definition of a “safe” withdrawal rate.

Michael E. Kitces, director of financial planning for Pinnacle Advisory Group in Columbia, Md., has studied drawdown rates as much as anyone outside of academe. While a 4 percent withdrawal rate is a good conversation starter, Kitces says “normal human factors” like vacation budgets and health care costs can create a disconnect. “There are all these factors that no one has written into the model,” he adds.

Up for discussion: To what extent do annuities or laddered investment strategies materially improve the picture or not? How do you account for unstable spending patterns? “If your goal is to spend little now, then sell your second home at age 70, that’s a big cash inflow in 10 years that no one’s model accounts for by default,” according to Kitces. “There’s robust work that still needs to be done.”

Milevsky cautions, too, that 80 percent of financial advisors aren’t even conversant with the 4 percent drawdown rule, which guarantees that a retiree won’t outlive his nest egg.

“We’re talking about an enormous education process. From my discussions with advisors, this is still a novelty. They’re clueless. They still need to be educated about what it even means. It’s not 4 percent of the portfolio; it’s the initial value, inflation adjusted,” he says. “We can’t abandon those advisors. The job we set out to do a few years ago on training for risks of retirement has to continue.”

Test-driving RetirementOne year before her clients are scheduled to retire, Wachovia Securities advisor Joy Kenefick has them test drive their retirement. For several months or as long as a year, the client lives exclusively on 4 percent of assets along with the income they would receive from Social Security and any pension.

Kenefick, and partner Marcia Tillotson, call it Retirement Boot Camp.

“Let’s say we’ve got all our I’s dotted and T’s crossed, meaning you’ve been saving and the house is paid for essentially. A couple of things happen,” says Kenefick, who is based in Charlotte, N.C. “First, it’s a little bit shocking and that’s good. Second, they become very conscientious about their spending footprint.”

Also, the 4 percent number “jars” clients into looking at the volatility in their portfolio and in the market. “It forces clients to get very real with what’s about to happen and how they feel about it,” she adds. “It also gives them the opportunity to save a lot of money that last year.”

Interestingly, most clients after testing their spending footprint decide to continue working. “Some decide they’re just not [emotionally] ready. Others would rather work another two to three years and save and raise their standard of living,” according to Kenefick. “The amount of money they decide they need in order to live comfortably becomes more important than the [retirement] date.”

Wachovia’s Lynne Ford says the firm’s advisors have expressed a “thirst for knowledge” about guaranteed-income-type products that will create a “sleep at night monthly income” as Social Security dwindles and traditional pensions go away. She also expects advisors at some point to begin drawing up a longevity profile of their clients. Already happening: Advisors who are building networks in their communities to hook up clients with health care experts, among other specialists.

“It’s added this whole new layer of responsibility…and resources are scarce right this minute,” Ford adds. “We need to figure out a way to provide easy access. It’s going to quickly become obvious that the advisor can’t be expert in everything. They are the portal. The ultimate challenge for everyone: How do we broaden our view of what financial services mean?”

Natalie Lera, vice president of client experience and product management for Schwab Institutional, says the “seeds” of next-generation products are already evident in the marketplace: structured products that will continue to evolve, for example, as well as insurance products unbundled from annuitization that will stand alone as an income guarantee wrapped around an investment account.

Adds Lera: “The world is changing. The current environment as it relates to what is happening in broader financial credit markets is catalyzing the intensity with which advisors are looking at risk.”

Veto, meanwhile, says Americans are at a place in retirement history that’s never been visited before.

“The golden age of retirement financial security is over. There’s no mistaking it in any individual’s or advisor’s mind. It’s done,” he says. But with product innovation coming to the fore, Veto says he’s hopeful.

“The single thing that’s most depressing to me is when a retiree who should be enjoying himself becomes totally consumed with worry. It robs them of the gift that is retirement,” he adds. “What if we as an industry could create an approach that tells someone there’s a zero percent chance you’ll run out of money? I think pieces are starting to emerge where we could create that for people. We have barely started the game, I know, but I have total trust and confidence that we’re going to figure it out.”

By The Numbers

What retirement income products do financial advisors turn to most often? Here’s what Cerulli Associates reports about usage across all advisor channels in 2007:46.1% dividend-paying stocks or mutual funds44.6% systematic withdrawals from mutual funds38% variable annuities with living benefits32.5% systematic withdrawals from variable annuities30.4% individual fixed-income securities10.3% annuitization10% packaged retirement income mutual funds2.8% reverse mortgages

Rethinking Retirement: A RIIA Report

New research from the Retirement Income Industry Association suggests that as they retire, baby boomers will discard “conspicuous consumption” in favor of “conspicuous conservation” — a major shift that will have a profound effect on financial institutions and advisors.

On the horizon: retirees who will use fewer products and have fewer institutional relationships. At the same time, the study says, they will have higher average asset balances, seek higher face amounts of insurance, tolerate higher credit limits while maintaining excellent credit scores, and require more involved advisory strategies than typical customers do today.

“From an industry point of view, it’s been a wonderful ride. The industry has gotten used to premium assets that come from additional relationships. But those relationships have started to flatten and to a certain extent dip,” notes consultant Elvin D. Turner, co-author of The Coming Consolidation: Making the Short List. “This is really important to understand. Quite frankly, conspicuous conservation presents some of the biggest challenges to the industry currently, also some of the biggest opportunities.”

As retirees simplify their lives and consolidate their relationships, winners and losers will emerge. In play: a concern about the future and such issues as limits to energy, drinkable water, breathable air, cheap transportation and doing more with less.

“If you have a customer who has [this] mindset…it’s not conducive to growth or new products. Winners are those who understand and embrace the same mindset: Your economic footprint matters, using non-toxic products matters, paper not plastic matters,” Turner says. “Advisors need to understand this. It becomes a marketing issue in terms of how they communicate and a sales issue in terms of how they position themselves. Advisors and winning firms will become part of the solution.”

Over time, retirees will demand that institutions and advisors offer more broad-based, multi-siloed, customer-focused solutions. Co-author Larry Cohen likens the strategy to that which is taking place in the telecommunications space.

“I’m sitting at home and the cable provider comes by and says I can give you cable, TV, wireless and an Internet connection. It’s one-stop delivery. That will be the mark of how an institution will succeed,” he says. “You take the existing relationship and leverage it into the next logical product and service area, then on to the next.”

For a look at a summary of the report, visit

o “Whether you’re a registered investment advisor or a stockbroker, you will have to transition from wealth and investment manager to risk manager… As uncomfortable as this might be, you’re going to have to learn about Alzheimer’s and Medicare.”– Moshe Milevsky, York University

o “Don’t be close-minded to annuities. It’s OK to be critical — and there will be an industry dialogue around these things. But you have to become students of new approaches. This stuff is going to be coming at you fast and furious.”– Dan Veto, Age Wave

o “The world is changing. The current environment as it relates to what is happening in broader financial credit markets is catalyzing the intensity with which advisors are looking at risk.”– Natalie Lera, Schwab Institutional

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].


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