It’s tough and intense, exacting and disciplined. It’s retirement boot camp, and clients who don’t get with the program could find themselves financially unfit for service when their golden years arrive.
With the focus on rigorous financial push-ups, retirement boot camp is the innovation of Marcia Tillotson and Joy Kenefick, a private wealth management team with Wells Fargo Advisors in Charlotte, N.C. The two partnered up more than a decade ago at Interstate Johnson Lane, a Wells Fargo predecessor firm.
Their boot camp process is a series of challenging tactical drills to financially prepare pre-retirees for retirement. Grads go on to experience a test-run retirement, living on their projected income.
The global financial meltdown has underscored clients’ need for professional retirement-planning guidance. But a Wells Fargo survey conducted last summer of 2,108 pre-retirees, ages 50-59, and retirees, ages 55-77, shows that nearly two-thirds lack formal plans for retirement savings or spending strategies and that only 35 percent of the pre-retirees have a written plan.
But wait — clients’ need for assistance is only half the picture. Financial advisors are looking for help too — namely, new ways and solutions to plan for those client retirements. This is clear from Update: Advisor Best Practices in Retirement Income, an October 2009 survey of more than 100 FAs, conducted by consulting firms GDC Research and Practical Perspectives.
“Advisors want clearer benchmarks on best practices and greater understanding of how their peers deliver retirement income support,” says Dennis Gallant, GDC president.
Indeed, despite the financial crisis, 62 percent of the advisors surveyed say that moving their practices toward retirement services remains a good strategy.
“This is a huge opportunity for advisors long-term,” says Howard Schneider, president of Practical Perspectives. “Only the tip of the boomer iceberg has gone into retirement. A big wave of retirees is still coming down the path.”
Tillotson and Kenefick’s boot camp — a client option they recommend strongly — is a precisely defined extension of their comprehensive planning process. It determines, in part, what retirement funds should be accessed first, and what is and is not taxable.
The training pivots on still-working clients’ saving disproportionately in qualified retirement accounts while, to make up the difference, supplementing their paychecks with cash drawn from unqualified accounts. This is, admittedly, tricky for lots of folks.
The two FAs — equal partners with $200 million in assets under management — hatched the idea eight years ago.
“We realized that when people get to retirement, it’s often like going from 60 to zero: the emotional impact is very hard. So we get them ready and used to the fact that they’re going to have to stop saving — accumulating — and start harvesting. We think ‘harvesting’ sounds better than ‘spending down,’” says Tillotson, a 22-year advisor who is branch manager of two Wells Fargo securities offices in Charlotte.
The drills: Boot camp clients, a year or two away from retirement, must provide figures enabling the gentle drill sergeants to analyze cash-flow; work up a net worth statement; perform an insurance audit. And clients must set retirement lifestyle goals; boost savings; obtain a tax projection; create a charitable-giving plan; and complete their estate plan.
Following these workouts, they should be all set to withdraw funds from non-qualified accounts and, in effect, live in financially simulated retirement.
Some are validated and more confident after the boot camp. But many clients realize they aren’t ready — financially or psychologically, or both — and opt to delay actual retirement.
Retirement Reality Test
The Advisor Best Practices survey indicates that helping retirement clients goes beyond investment management. “It’s much more about integrating solutions that allow clients to have peace of mind — providing them with income but also protection,” Schneider says.
To wit, six out of 10 advisors surveyed are spending more time planning and guiding clients as part of their retirement-income support, with many shifting from a product approach to a process-and-planning tack.
Financial advisor Dean D. Trindle, a senior vice president with Morgan Stanley Smith Barney in Cincinnati, and a retirement specialist, says that his “mission is to provide clients with peace of mind knowing that they can’t outlive their income.” Heading a team of nine, the FA manages $300 million in assets.
Super-satisfied Trindle client John A. Johnson notes: “Dean finds out where you are, where you’re trying to go and sets up the program to get you there. He really wants to understand your goals.”
After Johnson’s near death at 53 during heart bypass surgery, he instantly moved up his retirement target age to 55. Now twenty years later, “with Dean’s counsel and guidance, my wife and I have more in net asset value than we did when I retired,” he says. Trindle helped the Johnsons meet a major goal: relocating from Cincinnati to Amelia Island, Fla., where they built two lovely homes.
Trindle, concentrating on retirement planning for 30 years now, also partners with MSSB advisors outside his team to help them with retirement-client needs.
“Most often they have a hard time transitioning from the days of ‘I’ve got to make the client rich’ [accumulate wealth] to clients’ being retired and needing to distribute that wealth. Relative performance [e.g., beating the Dow] is totally irrelevant; it’s not in tune with what a retiree is looking for,” he says.
The Wells Fargo boot camp, which largely assesses clients’ ability to realize an envisioned retirement lifestyle (typical client has $1 million in investable assets) often throws dream-world plans into reality’s harsh light.
“One of the best values we can add is putting a price tag on client goals and helping if their goals are unrealistic,” Tillotson says.
The numerous exercises are a big challenge for most — though existing clients have completed several prior to boot camp — beginning with Drill No. 1, an all-inclusive cash-flow analysis.
“If you really think it costs you ‘X’ to live per year, then you have to call that number out — and now we’re going to see how real it is,” says Kenefick, a financial planning specialist and advisor since 1997. “If clients are living at or above their means, the first order of business is to turn the ship so that they’re able to save to achieve their goals. If we can’t get them to make sacrifices and adjustments to get ahead, there’s not a whole lot [else] we can talk about.”
The second-most critical drill at retirement boot camp is saving disproportionately in qualified accounts, such as a 401(k) or IRA, while simultaneously spending down money from retail accounts.
“People who are prepared for retirement are those who have been exceptionally good savers,” Kenefick explains. “But for the best savers, making that transition to harvesting is very difficult because it’s so outside their comfort zone. It’s like wearing their shoes on the wrong feet.”
Adds Tillotson: “They want to horde the money and never take it out. We want to get them in the mind-set that they’re going to start pulling [out] their money. This is what retirement boot camp is all about.”
Meantime, the process — included in the advisors’ overall fee of between 1 percent and 1.35 percent of investable assets — has the additional benefits of lowering tax brackets, increasing savings and converting clients from unconscious to conscious spenders.
The debt-averse advisors recommend unequivocally holding off retirement until the mortgage has been paid in full.
They tirelessly seek out opportunities for pre-retirees to shed debt: Should a client receive a large bonus, for instance, where would it work hardest? Put toward the mortgage? In a 519 plan?
Processes and Products
The Gallant-Schneider survey found rising health-care costs to be a top advisor concern, just as it is with retirement clients themselves.
Independent advisor Matthew Sliwa, a partner with KSP Financial Consultants, affiliated with Commonwealth Financial Network, pays particular attention to pre-retirees’ tax returns to determine the future income they’ll need plus the most tax-efficient timing for paying unforeseen health and dental expenses. The latter, he says, can run as high as $10,000 or $15,000.
“If advisors don’t do an annual tax [review] for their clients, they’re missing the boat on how much income to take for retirement and where to take it from,” he says.
Tillotson and Kenefick pull no punches in discussing retirement boot camp with prospects. “We want them to know what they’re getting into,” Tillotson says. “That cash-flow analysis is some work. We beat it into glue because it’s the foundation for all the decisions. If you come into this process, you have to take that cash flow very seriously and commit to it — or else you’re not a good fit for us.”
She continues. “But when a new client comes back with their Quicken spreadsheet, cash flow down to the penny, and is looking for a pat on the back, we know they’re ‘getting’ it — and that we can make them a good client.”
For advisors who want to incorporate such a process into their practices, Tillotson warns that it’s not without pitfalls. For one, sloppy documentation can be a trip-up. “Because we’re providing recommendations about so many aspects of the client’s finances, it’s very important to document what you say. Being able to look back at [what's in writing] and remind clients of recommendations and decisions that we agree to is key to accountability for us and our clients.”
At Morgan Stanley Smith Barney, Trindle’s process starts with the client’s paycheck and works backward to match desired retirement income with salary. He therefore creates portfolios heavily weighted in income investments.
“What’s safest and most effective will determine where we are in stocks, bonds or preferreds — or all of the above — or any other income source,” he says.
Most of Trindle’s clients are Procter & Gamble retirees whose retirement funds are chiefly in P&G stock. “But it’s risky today to be in such a concentrated position with any particular investment. So we immediately begin to diversify,” he says.
According to the Advisor Best Practices survey, many FAs expect to increase use of ETFs for retirement investments. These advisors “aren’t trying to outperform the market,” Schneider notes. “They’re trying to provide market-level returns. ETFs’ low cost and flexibility allow them to do that.”
The survey also points to growing adoption of annuities, especially among advisors using an “income-floor methodology,” which features these or other guaranteed investments. This allows income “needs” to be met “regardless of market vagaries,” Schneider says. The rest of the portfolio is invested for income “wants,” which he defines as vacations, new cars, gifts to grandchildren and other discretionary spending.
Advisor Sliwa, in Waltham, Mass., uses annuities — particularly those with living benefits — for retirement-client portfolios. But, he notes, FAs must read the fine print: “You need to know how much can be taken out. If you exceed the annuity company’s maximum level, it can throw into jeopardy all the guarantees that are built into the contract.”
For creating a retirement plan, Sliwa stresses the need to update Monte Carlo simulations every two years. “Clients should not have an under-90 percent likelihood of success with Monte Carlo planning,” he says.
Notwithstanding the time and effort involved, Tillotson and Kenefick gain exceptional gratification from conducting the boot camp. “After clients spend time working on their numbers and realize that they’re taking control, it’s exciting to see that light bulb turn on,” says Kenefick. “And when they’ve gone through the boot camp and move into the harvesting phase, it’s like watching a picture puzzle take shape.”
Affluence Vs. Wealth
For affluent new clients who are reluctant retirement savers, Wells Fargo boot camp advisors Marcia Tillotson and Joy Kenefick serve up an eye-opening tutorial on the difference between affluence and wealth.
“We tell clients who are living at or above their means that unless they move themselves down the continuum to living below their means, they may be affluent but they’ll never be wealthy. That resonates,” Kenefick says. “It’s often the trigger that changes behavior.”
The two view clients’ finances as businesses that the clients own and the advisor team manage, they tell clients.
“People put more time into their pets and their gardening than into thinking about their finances. But after all,” Tillotson says, “this is their net worth we’re talking about!”
However, now many of the advisors’ existing clients eagerly look forward to boot camp and simulated retirement.
“You’ll tell me when I’m supposed to do the retirement boot camp, right?” they ask. – J.W.R.