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3 Ways to Combat Client Disengagement

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Alicia Munnell, director of the Center for Retirement Research at Boston College, caused a bit of a stir recently by arguing asset allocation has a relatively minor role in retirement success, and that working longer and even reverse mortgages are far more effective “levers.”

Tim NoonanTim Noonan (left) isn’t buying it. Noonan, the managing director of capital market insights with Russell Investments, says that while he agrees with Munnell’s logic, he disagrees with her conclusions.

“She equates asset allocation with the classic method of doing it; the mean-variance, 60/40 approach, which is out of step with the way in which many now view effective asset allocation,” Noonan says.

Noonan adds that he’s seen a “fork in the road” over the past few years, in which there has been enormous product innovation, something that appears to be a positive. In reality, it equates to enormous product turnover, which is a “crushing development” for advisors and distributors.

“There is now a whole new flood of products with which they must now discriminate against (with clients),” he says. “Investors aren’t disengaged because of scarcity of product choice–they are disengaged because they feel unseen by their advisors. Oversupply of product choice has always been a leading feature of the asset management industry.”

This innovation falls into two camps, Noonan explains. The first comprises those who believe asset allocation must be faster, more adaptive and more tactical.

“The problem is that this type of short-term forecasting introduces more forecasting risk, right at the time clients typically want less risk and are being told they have less risk.”

The second camp recognizes that the locus of forecasting lies not in the capital markets (a refreshing statement from a managing director of capital market insights) but from the clients’ own goals.

“The conundrum is that it forces advisors to do what many do not like,” Noonan says. “That is, they have to fact-find with the client, and really understand the income requirement necessary to achieve a successful retirement.”  

A large number of advisors will conclude that level of fact-finding is not something they want to do, and it is those advisors that will be drawn to the “shiny, new whistles” many new products represent. Other advisors will look at the current level of client disengagement, which is at an all time low, and realize they must present themselves as a true financial or investment advisor.

“The catalyst for the industry is in realizing that the retirement planning process can’t be a cosmetic project done in a fee-based environment,” Noonan adds.

He points to Wells Fargo Advisors’ Envision system as an example of a “manifestation” of what is needed from the client-centric approach he describes. Envision has a five-set process in its approach:

1.  Conduct a personal interview to help you define measurable goals.

2.  Prepare a comprehensive analysis of the client’s entire investment situation.

3.  Review the details of the custom investment plan.

4.  Execute the investment recommendations.

5.  Review the portfolio and provide pertinent information on any recommended changes. 

“For ordinary people, investing has come to feel like being at the mercy of the ‘Risk God,’ a mean little kid (think Eddie Haskell) who manically flips the risk switch on and off seemingly without warning, often associated with economic distinctions that are poorly understood or with political disputes between people with whom they have little affinity,” he says. ”Add to this perceptions of institutional mistrust and the selfishness of the 1%, and you have all the ingredients. If you were going to create a recipe for disengagement, it’s hard to imagine a better one.”

Noonan observes that the “stagnant” levels of client trust are driven by systematic client disengagement from the planning process. This systematic disengagement must be addressed in the following three areas:

1.  The advisor must uncover the amount of income needed to defend the client’s lifestyle in retirement. “This is really a psychological question, since everyone is afraid of going broke. The advisor must say to the client, ‘Tell me what you’re afraid of?’”

2. The advisor must then help the client to have a vision of their future lifestyle and evaluate the lifestyle’s sustainability.

3. The advisor must then connect the portfolio to that goal.

“This is the new asset allocation paradigm,”  he said. “It’s one that has more to do with a couple’s retirement success that with what interest rates in China might look like next year.”

Russell’s strategic response is to start by putting the client back as the center of attention, rather than the economy or the markets. 

“As such, ‘Risk Right’ is the antidote to “Risk-On/Risk-Off,” Noonan concludes. “You take only the risk that you must take to solve for the investor’s personal lifestyle goal—and not a drop more. To do this, you can’t generalize the end investor, they must be individually, personally identified, and not objectified into personas, segments, target markets, avatars (or other distinctions that simplify life for the manufacturers). Creating the apparatus for that discussion between the advisor and the investor is the most important priority we’ve got [at Russell].”


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