By Dennis Gallant and Howard Schneider
The growing shift to retirement income raises key questions for most advisors. What does the transition to supporting retirement income clients really mean? How do best practices actually apply to an advisor’s business model? And when and how should advisors begin aggressively shifting the focus of their practices to retirement income?
Our research looking at best practices of advisors serving retirement income clients makes it clear that these practitioners didn’t wake up one day, flip a switch and suddenly begin to focus on retirement income. More typically, these advisors made a more gradual transition, with many years of involvement in serving aging clients making the shift to living in retirement. In addition, these advisors may themselves have had to deal within their own family with the challenges associated with retirement transitions, whether guiding someone through a career-changing decision or placing a loved one in a nursing home or extended-care facility.
A common element of best practice advisors is their ability to self-actualize their practices. In essence, this means making the conscious decision to craft a business model that serves longevity clients, rather than simply accommodating the needs of retirees as part of a more generalized practice. As noted in the chart below, more advisors anticipate making this deliberate shift in emphasis to retirement clients as the boomer wave continues.
This deliberate shift includes undergoing specific training on retirement income or elder-care issues, adding products or investments that are more retirement income-based, adding staff to round out areas of expertise and help with the increased client-related workload, or establishing a broader network of external contacts to support the growing scope of retirement needs.
Additionally, advisors need to create a formal assessment of their practice with a detailed approach to defining the scope of services they wish to support. Specific steps in this process should include:
o Client Review – Advisors should review their current client book to determine how many of their clients are in the prime zone for longevity support, typically between 55 and 72 years of age. The age parameters of their overall client base of will aid an advisor in determining the level of services that need to be offered and the urgency of the transition. It will also identify clients that should be targeted initially and those clients that may be at risk of leaving and going to a best-practice advisor.
o Client Attributes – Advisors need to understand the type of client they intend to serve in retirement and establish a clear target audience. This involves getting a handle on the affluence of the target client, since this factor will strongly influence the level of service and customization that can be provided to aging boomers. It will also identify opportunities the advisor might be leaving on the table by not focusing on longevity planning. Advisors need to understand what percentage of client wealth they now manage or control.
o Service Offering – Advisors must understand what services they currently offer that are appropriate for retirement income clients. This includes the level of advice and planning support they provide, their approach to building retirement income portfolios, and the scope of other solutions they make available. They must also develop a handle on what additional areas of expertise and support they will need to deliver in order to meet the needs of targeted retirement clients.
o Compensation – Best-practice advisors today are primarily fee-based in their compensation model. With the increasing focus on advice and support beyond traditional areas of service, advisors migrating to longevity planning need to be open to alternative ways of being compensated, including methods such as planning or retainer fees.
o Resources and Delegation – Most of the leading retirement advisors are part of a team practice. According to our research, just one in five of these advisors is a solo practitioner. To meet the demands of their expanded role, longevity-focused advisors will need to add resources or delegate certain functions.
The most essential practice assessment for advisors migrating to longevity planning is determining their capacity constraints. Capacity issues are nothing new to advisors. The shift to fee-based practices and advice delivery has generally created capacity challenges, especially in the form of time and knowledge constraints.
Time capacity is the most common capacity constraint and has a profound impact on the number of clients and the level of services an advisor can provide. The client-development process typically requires 10 to 15 hours of the advisor’s time per client and can be even lengthier depending on implementation. In addition, ongoing communications and meetings with existing clients through the initial post-retirement years can be a significant drain on time.
In addition to capacity challenges, addressing the needs of retirees has an impact on what we define as “knowledge capacity.” As advisors attempt to expand their offering to meet retirement-client demands, many will be faced with constraints related to knowledge and expertise, especially in less traditional areas. Even in more traditional aspects of support such as asset management, the demands for support can be a challenge because of greater complexity and the need for a more institutional-like approach to deliver stable income over extended life expectancies. Advisors will need to be highly knowledgeable about legacy issues that involve wealth transfer including wills, estate planning and trusts. Addressing the emotional or softer issues for clients such as funeral arrangements, health-care, and career counseling are not core areas of expertise for many advisors at present.
Ultimately, advisors looking to gain a foothold in the growing market for retirement income support must determine how they can add value to the clients they serve. On an individual basis, advisors must identify how much change their practices need to undergo to truly deliver retirement support.
As with all change, the more deliberate the effort an advisor applies to the transition, the greater the likelihood of realizing the potential this emerging marketplace can offer. One advisor said that the old FPA mantra applies to her own practice: “People don’t plan to fail, they fail to plan.” It’s the same for advisors.
If you are an advisor who would like to share experiences or practices in delivering retirement income and longevity support, we welcome your perspectives. Contact us at firstname.lastname@example.org or email@example.com.
Dennis Gallant is president of GDC Research. Earlier, he was a director of Cerulli Associates and a vice president for Funds Distributor in Boston.
Howard Schneider is the founder of consultancy Practical Perspectives near Boston, worked previously for Scudder Investments and has served as chairman of the Mutual Funds Education Alliance.