How do you provide high-level retirement income advice to your clients? It’s a single question with multiple answers—and it’s reshaping the geography as advisors search for ways to address what could be the toughest challenge of their careers.
“This is a much bigger ‘big picture’ change than most people are comfortable with. In retirement, you must operate at the household level, not the account level. In the investment management days, we were able to limit ourselves to working with a client’s financial capital. In retirement, it’s human capital, social capital and financial capital,” observes François Gadenne, chairman of the Retirement Income Industry Association. “A lot of advisors have been in denial. But you can’t outrun this. To do this job today, the investment manager has a new name: retirement management professional.”
While many remain highly confident in their ability to serve retirees, one research study suggests there is an undertone of worry among advisors—not only about the soundness of their retirement income strategies, but about continuing market volatility, alarmingly low interest rates and uneasy clients who just aren’t sure what to make of retirement planning anymore.
The report from GDC Research and Practical Perspectives, “Trends in Advisor Delivery of Retirement Income 2012,” tags it “the confidence dilemma.” As Howard Schneider, who heads Practical Perspectives, frames it: “It’s like advisors are walking down a dark alley with this sense of bravado about them, but they are constantly looking over their shoulders and wondering: Aren’t there better things I can be doing for my clients? How do I stay on top of everything given all that’s swirling around? It’s an enormous challenge.”
That nagging worry is also deeply affecting clients across income levels. As an example, the latest Affluent Insights Survey from Bank of America-Merrill Lynch revealed this surprising nugget: Four out of five respondents with $250,000 and above in investable assets worry that they won’t be able to accomplish certain financial goals before they retire. Forty-two percent say they’re concerned they haven’t saved enough to sustain their lifestyle in retirement, and just over one-quarter report they’re unsure they will be able to pay off or invest more in their current home, or have the inheritance in place they had wanted for their heirs.
“In the new normal that is this economy, these things may not happen,” notes Bill Hunter, head of personal retirement solutions for Bank of America-Merrill Lynch. “And whenever there is uncertainty, you look for advice or counsel. Because of the uncertainty, the conversations with clients are going to be very broad and very meaningful. This is a time to assess different priorities and different goals. It’s a new normal for everybody.”
Notably, financial services firms are ramping up their retirement income offerings. A Hearts & Wallets industry survey found that, in 2012, 77% of firms rated retirement income solutions as vitally or very important to strategic planning initiatives over the next one to three years, as compared to 57% in 2010.
What are the qualities of leading retirement income advisors today?
First, says Schneider, retirement income advice is something they deliberately focus on. It is an important element, if not the most important element, of their practice. Tied to that, top advisors have well-developed processes and capabilities. Finally, the best advisors support both traditional and non-traditional needs that arise in retirement. That includes tackling questions about Social Security optimization, Medicare, health care coverage, nursing home care and lifestyle considerations. And, in today’s vexing environment, successful retirement income advisors are also helping clients make trade-offs.
“They’re helping clients develop a realistic vision of life in retirement. Retirement is no longer that commercial vision of the beachfront house. Inevitably, it will involve trade-offs because there may not be the income to do all the things you truly wanted to do,” Schneider says. “Asset accumulation was about focusing on a rate of return and target of when you needed that money by. Retirement income is trickier, it’s about juggling objectives. Today, it’s about being much more than an investment advisor. It’s almost like being their advocate.”
Here’s a look at emerging trends in the retirement income space:
Industry statistics suggest it takes advisors more than twice the amount of time to provide retirement income advice when compared with investment management. But how do they charge for it? Recent research from Hearts & Wallets shows that 81% of firms say that advice on Social Security should be within the scope of an advisor’s offering, up from 65% in 2010. Yet as Hearts & Wallets principal Laura Varas puts it: “Social Security, Medicare, thinking through health care risk—these are not activities that historically have had compensation tied to them. Meanwhile, investors are asking: What do you do? How do you get paid? Free advice just contributes to the confusion. Why is it free? Nothing is free.”
Shannon Reid, director of retirement solutions for Raymond James Financial, agrees that compensation needs be addressed head on. One possible alternative: a law office-like model that involves an hourly fee. But, Reid adds, “For the most part, advisors are not getting paid for this kind of advice. They’re offering it as the price of doing business. There are not many models out there yet.”