In part one of this series, we explored whether the common business concern for financial planners over their aging client base is overstated, when we consider the long term survival of the clients’ assets if they are withdrawn at the ‘safe’ 4% level.
Another classic concern of the AUM model with retirees is that as they age, clients will ultimately pass away, and most firms struggle greatly to retain assets (one study estimates that advisors will lose as much as 90% of the assets that pass to the next generation).
Yet again, a critical look at mortality statistics suggests that this client attrition through death is more likely to be a decades-distant challenge than a near-term one. For instance, the chart below shows the survival rate for males, females, and couples, based on the Social Security Administration’s mortality tables.
As the figures show, while the mortality rate does rise as retirees move into their 60s and 70s, the joint life expectancy — i.e., the probability that at least one member of the couple remains alive — remains extremely modest in the first half of retirement. It takes 15 years, from age 65 to age 80, for just the first 10 percent of client couples to pass away, at a rate of less than 1 percent per year. Only as the couple enters into their 80s does the joint mortality rate begin to accelerate, where 25 percent of couples have passed away by age 85, and only at age 90 does the joint survival line finally move below the 50 percent threshold.
Of course, some criticize the Social Security mortality tables as unrealistically conservative for financial planners in the first place, as clients of planners tend to be more affluent with better life expectancies than the broad population assumption from Social Security. Some suggest the Social Security tables fail to sufficiently adjust to anticipate a continued trend towards medical improvements that may further enhance life expectancies between now and when today’s baby boomers actually do reach their 80s and beyond. For planners, that means in practice that client survival rates may even be slightly better than the chart above indicates.
Losing a tailwind is still a headwind
The asset losses due to retirees taking withdrawals and eventually passing away may not be an avalanche of outflows anytime soon, given that the very oldest baby boomers are “only” in their late 60s and the youngest are only just turning 50 this year. The reality is that relative to businesses that were built on the basis of working with accumulators, the fact that clients aren’t adding assets is a lost tailwind that will no longer aid the growth of business revenues. Also, clients tend to have more conservative portfolios at retirement that reduces the portfolio’s contribution to the growth rate. So while the actual headwind of client withdrawals and attrition may be modest, the ‘net’ headwind of shifting from net savers to net spenders and reducing the anticipated portfolio growth rate is a bit more dramatic.
Nonetheless, the results here suggest that ongoing retirement withdrawals (at a ‘mere’ 4% withdrawal rate) and attrition from clients passing away (even at today’s mortality rates) is not likely to hit baby-boomer-centric advisory firms any time soon.
I’d argue that the greatest impact doesn’t really begin until clients approach their 80s, which is a decade away for even the oldest boomers and not until the 2030s(!) and beyond for most. That also assumes that medical advances don’t push out client life expectancies even further, which would both reduce client attrition from death and also likely lead clients to moderate their spending further in anticipation of longer life.
So which clients should you focus on?
In turn, these statistics suggest that advisors should be cautious about how aggressively they adjust their business strategies to account for an aging client base. For instance, while much has been made of the importance of building relationships with the children of clients in an effort to retain assets, these statistics suggest it may be far more important to simply focus on establishing a relationship with the prospective surviving spouse of a couple, rather than their children.