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Leaders and Laggards: Advisors’ Processes Define Success in Retirement Income Support

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A report released on Monday by GDC Research and Practical Perspectives highlights trends in the way advisors will have to deliver retirement income in light of low interest rates and increasing apprehension from their clients.

The report identified advisors who were leaders, those with well-developed processes and more robust practices, and laggards, those with less well-defined capabilities. Leaders typically offer a broader range of services beyond investment management and education.

“So many organizations treat the market as if everyone is the same,” Howard Schneider, president of Practical Perspectives and co-author of the report, told AdvisorOne. Advisors, however, see themselves as distinct. It was the advisors in the study who made the distinction between leaders and laggards, Schneider said. “Advisors who say they have well-defined capabilities stand out versus those who say some of their processes need help,” according to Schneider.

The leaders, he said, are generally more confident and tend to focus on the content of how to deliver retirement income support. “They understand how, but they want to understand the nuance,” he said.

Schneider pointed out that leaders and laggards need different things. Product providers should remember that what is interesting to a leader probably isn’t the same as what is interesting to a laggard.

The first thing lagging advisors need to do to move into the leader category is to define which approach they want to use, according to Schneider. “There’s no one way” to approach retirement income support, Schneider said, adding that they found advisors were split among total return, income floor and bucket style processes. Advisors who want to become leaders need to “get more experience and make retirement income support a priority,” he said. “A lot of laggards are not focused on retirement income support as a separate discipline.”

Furthermore, laggards need to identify the right tools, whether that’s planning software or distribution tools. A deeper understanding of the broader issues affecting retirees is also important, Schneider said. It’s not just about investment management; Social Security, Medicare and elder care are all important issues that retirees will face.

“Many advisors still lack the capabilities and processes that are so important to efficiently serve this expanding market,” Dennis Gallant, co-author and president of GDC Research, said in a statement. “We find that advisors with more well developed approaches–‘the Leaders’–significantly outpace ‘the Laggards’ on key measures such as average client assets and overall client wallet share. The areas of support advisors would like from product providers and distributors also differ based on existing capabilities in place.”

The most significant issue for advisors working with retirees, the report found, is helping them deal with health care costs and sustain the retirement lifestyle they imagined. Half of advisors said they encourage their retiree clients to target a 4% withdrawal rate.

“It appears that over time, more advisors are shifting away from traditional ‘total return’ focused portfolios and are instead relying on some form of sustainable or guaranteed income to serve clients, especially the mass affluent,” Schneider said.

Low interest rates pose a significant challenge for advisors, more so than market volatility. As a result, many are turning to dividend-paying equity investments, variable annuities and alternatives. Advisors do not rely on a single solution, according to the report, instead integrating a variety of products. Retirement income portfolios are heavily allocated toward actively managed funds, while many advisors used no allocation toward structured products and index funds.

In 2012, advisors expect their main focus will be on generating long-term income, managing client fears and expectations, and managing portfolio volatility.

The report is based on surveys conducted in November 2011 from nearly 400 advisors in the wirehouse, regional, bank, insurance, independent broker-dealer and RIA channels. Data was gathered online and supplemented by interactions with advisors at seminars and other presentations. The full report is available for purchase.

“Advisors say they’re confident in terms of their clients’ retirement success,” Schneider concluded, “but we found they are giving equal priority to enhancing their process. They’re spooked by the environment and are looking for validation.

“Hype has turned into reality. Advisors are telling us they’re growing, but it’s important to recognize that the marketplace is nuanced, just like retirees are nuanced. It’s not a homogeneous industry and the market is not coalescing around one solution,” he said.