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Retirement Planning > Retirement Investing

5 Trends in How Advisors Work With Retirement Income Clients

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Retirement income investors comprise the core target audience for many advisors.

A new report released Wednesday by Practical Perspectives and GDC Research, two independent consulting and research firms working with wealth management providers and distributors, examines trends in how advisors work directly with individual retirement income clients.

The report is based on input from more than 600 financial advisors gathered through an online survey conducted in July and August 2016. Those surveyed include full-service brokers, independent brokers, financial planners and RIAs.

“While support for retirement income clients is a core activity of virtually all advisors, few specialize exclusively on the topic and many still do not have a significant focus on offering help with less traditional subjects such as Social Security, healthcare or cognitive aging issues,” Dennis Gallant, co-author of the research report, said in a statement.

And while retirement income investors make up a large portion of advisors’ clientele, there’s no industry-wide consensus on how these investors should be handled.

“[T]here remains great diversity in how advisors work with [retirement income] clients, and little consensus on how to deliver income, which solutions to rely on or the principles to guide support,” Howard Schneider, president of Practical Perspectives and author of the report, said in a statement. “There has been virtually no shift in the philosophies advisors use to manage portfolios or greater agreement on the best solutions to use for these investors.”

Here are a few highlights from the 85-page report:

1. How many retirement income clients do advisors have?

For nearly 6 in 10 advisors, retirement income relationships represent more than half of all assets managed, according to the survey. Over half of advisors (53%) indicate retirement income investors are more than half of all clients they currently support. And the study finds most advisors expect their focus on retirement income relationships to grow modestly over the next 12 to 24 months, as will the number of retirement income clients served and total assets managed.

2. What investment philosophy do advisors use most frequently to generate retirement income?

Advisors are divided as to the overall philosophy they use to generate income for retirement clients, according to the survey.

More than 2 in 5 advisors (45%) use a total return methodology for generating cash flow for retirement clients.

“These advisors are not focused on income as an outcome for managing portfolios, but instead work to generate an optimal total return consistent with the client’s risk parameters,” the study states. “They then draw down the portfolio as needed and appropriate to satisfy client income needs.”

Meanwhile, nearly one in three advisors rely on a “pooled” or “bucket” approach, which the study describes as “deconstructing” portfolio management into different duration or objective-based pools of assets.

According to the study, roughly 25% of advisors use an income floor methodology, combining guaranteed or income producing solutions to meet current cash flow needs with a diversified total return approach to generate long-term gains, maintaining purchasing power and sustaining the portfolio over time.

3. Which types of investment platforms do advisors use for managing assets for retirement income clients?

There is heavy use of advisory or fee-based platforms in managing assets for retirement income clients, according to the study, and only limited use of more traditional commission or brokerage platforms.

The study shows 72% of the advisors indicated they rely heavily on advisory or fee-based platforms in managing portfolios for retirement income clients. This compares to only 22% that rely heavily on traditional brokerage platforms.

4. What products and solutions do advisors use in managing portfolios for retirement income clients?

The study finds significant differences by channel in the extent various vehicles are used in managing portfolios for retirement income clients.

RIAs are least likely to rely on annuity solutions, especially variable annuity products. The study also finds that RIAs are far more likely than other advisors to make widespread use of ETFs and passively managed solutions.

Meanwhile, full service channel advisors are the most pronounced users of individual securities, while independent channel advisors have widespread use of annuities, especially those with living benefit riders.

5. How is the Department of Labor’s fiduciary rule likely to impact various aspects of retirement income support?

As part of the study, advisors were asked how the recent DOL ruling on retirement advice may impact support for retirement income clients.

The most notable impact appears to be on increased use of fee-based platforms and solutions, with 43% of advisors in strong agreement and 27% somewhat agreeing. Some advisors also anticipate relying more heavily on lower cost solutions (21% strongly agree, 34% somewhat agree) and to consider fee-based annuities (10% strongly agree, 25% somewhat agree).

However, most advisors do not believe the DOL ruling will cause a change in the investment philosophy or approach they employ for retirement income or in the solutions they recommend.

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