The New Retirement Advisor

There’s been a lot of talk about retirement income distribution planning over the last couple of years. Now for the action — early stage industry trends that promise to do no less than reshape the role of the leading-edge financial advisor.

As Francois Gadenne, executive director of the Retirement Income Industry Association, said at the organization’s annual meeting in Boston recently: “It’s not going to be same-old, same-old. Change agents are never pretty or polite. They change things.”

Already, advisors at the forefront of longevity support and guidance are redefining just what it means to be an advisor, according to a new research study compiled by two Massachusetts-based consulting firms, GDC Research and Practical Perspectives.

“This is still a marketplace that’s not well defined in terms of solutions. It’s very diverse in terms of how advisors are addressing these needs,” notes Dennis Gallant, GDC’s president. “There’s no role model here. They’re building it.”

Among the notable developments identified in the 108-page report:o A broadening scope of client support, with core advisory services extending to include challenges such as health care, elder care and family issues.o A consideration of both the financial and emotional aspects of retirement — or life planning.o A growing emphasis on longevity planning.o The need among advisors for deeper relationship management skills that combine both technical and emotional support for the demands of retirement living.o A planning-centric business model oriented to independent, fee-based team practices.

The report, “Advisor Best Practices: Retirement Income & Transition Support,” suggests that fewer than 5,000 of an estimated 300,000-plus registered financial representatives in the U.S. are currently “heavily” focused on the delivery of retirement support.

But that will no doubt change.

As Gallant observed: “This is something you’re going to see broker-dealers and asset management firms begin to grapple with: how to support the process. Not a large portion of advisors is demanding it just yet. It’s emerging, it’s growing and it always starts with large practitioners. We’re only in the first inning here, maybe the second.”

The shift in approach occurs at a time that Americans are famously unprepared for retirement. A Bank of America survey undertaken early in the year revealed that 30 percent of Americans find that starting retirement planning is tougher than starting an exercise regimen or a diet. While 80 percent were familiar with 401(k) plans, one-quarter chose not to use them. Likewise, 68 percent were familiar with IRAs, but only 40 percent had one.

Meanwhile, Ernst & Young’s Retirement Income Practice reports that three out of five new middle-class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living. Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize going broke. For Americans seven to 10 years from retirement, that number is 37 percent.

To be fully effective, Practical Perspectives head Howard Schneider said advisors are going to need to become a “master of the client relationship,” adept at helping clients address both financial and personal challenges.

“The question of ‘What am I going to do with my time?’ is related to ‘Am I financially prepared to give up my full-time employment?’ Even if they don’t see themselves as a life planner, advisors have to help clients with these personal issues,” says Schneider. “We’re hearing from advisors that clients are sitting there with stunned looks on their faces asking, ‘What is it I should be doing?’ And that question comes before: Do you have the right health care protection, the right insurance protection? Are you taking care of elder parents?”

Moreover, he adds: “Transitioning to longevity is a unique event, when you think about it. It’s not something people have role models for. There’s not a patch individuals can look back at and say: ‘I’ve done that three times in my life.’ It’s not like buying a house or buying a mutual fund. There’s no pattern to look at. You can talk to friends or peers, but we’re each so individualistic you have to approach this in a customized way.”

Industry observers say that advisory teams and external networks — offering specialized advice on everything from career counseling to health care selection — will become a hallmark of the next-generation advisor.

“There is so much more knowledge they are going to have to learn. It’s going to be virtually impossible for one individual to do that. The advisor of the future is a team, a three-headed advisor,” according to Moshe A. Milevsky, executive director of The IFID Centre and associate professor of finance at the Schulich School of Business at York University in Toronto. “One person working out of his or her garage that’s clearing through Fidelity and trying to make a run of it — well, it’s going to be very difficult to survive that way.”

Milevsky said college-level education is already beginning to address the changing marketplace with training on the largest financial planning software systems, investor psychology and business development. RIIA at its annual meeting in September unveiled a template, still under development, for a new designation: the Retirement Management Analyst.

“There are all kinds of designations out there, but the bottom line is reps feel they need more credentials. They need more education. There are 180 designations in the financial world. Obviously, that’s overkill,” said Gadenne. “Is there one that can fill the gap?”

Master classes built around the proposed designation will likely be introduced late next year and distributed through universities and other channels. Fifty percent of the content would be unique and valuable to someone with a CFP or Series 6 license.

Milevsky, notably, foresees a time when there won’t be dozens of designations — just one.

“I almost think that becoming a financial planner will be like medical school at some point with training, residencies, internships, continuing education requirements and board certification. You can do a lot of harm if you don’t know what you’re doing,” he said. “You don’t need an explosion of credentials, you need an implosion. The maturity of the industry will show when only three or four credentials are left. How many credentials do you know for a medical doctor? I just know one: M.D. When that happens, you’ve got your advisor of the future.”

Trends In PlayThe resounding march of baby boomers into retirement and companion trends have been well documented. Elvin Turner, managing director of Turner Consulting in Bloomfield, Conn., is watching several other emerging trends that he believes will influence the retirement income picture in years to come.

First, he says, he’s been shocked at the number of advisors he’s talked to who say even very affluent clients are “looking for money” as they try to stretch budgets. Next, Turner, an expert in emerging retirement income opportunities, is forecasting something he calls “Defined Benefit Regret.”

Most employees don’t realize it, but as a result of job-hopping over the span of a career, they will receive just a fraction of their expected defined benefit. “They have no clue,” says Turner. On top of that, as corporations freeze their defined benefit plan contributions, savings will dry up. “These stories come out in waves — the credit crunch, the mortgage crisis,” he adds. “This will be another wave and the advisory community is going to have to deal with this in terms of income not being there.”

Finally, even with health care predicted to cost well over $200,000 per couple in retirement, Turner says many advisors are failing to meet the challenge head-on. “I see the reaction from the advisor community: They don’t want to deal with it. They don’t understand it. And they say, ‘Please, let’s not go there.’ We have to go there,” he notes.

Against this backdrop, the need for clear and informed guidance from the advisory community is fierce.

“Life planning skills are going to be needed like never before. If advisors manage money in a vacuum they are in trouble, particularly as folks hit the retirement stage of life,” according to Turner. “Given all this, the advisor has to have a broader background than they typically do today. We need to start with education and build an awareness of a wider range of topics than advisors are aware of today. Once you have that awareness, you can put strategies in place to address and manage these areas.”