Working with clients in or approaching retirement is no walk in the park.
It is, according to a new research report from Cerulli Associates (CA), fraught with challenges.
“Building and managing client portfolios through their accumulation years is difficult in its own right, but the results of missteps generally can be overcome in time,” say the authors of the CA report, IMCA’s Research Quarterly. “In contrast, blunders during a client’s distribution period can fundamentally damage the investor’s ability to finance an expected retirement lifestyle and there are generally few opportunities to overcome severe missteps.”
Not surprisingly, CA says advisors across the industry are taking a broad set of approaches to address these challenges with some “embracing the prospect of becoming experts in assisting retiring investors and others “trying to move forward with as little change as possible in the operation of their practices.”
How exactly are advisers dealing with retiring clients? Here’s what CA found in its survey of IMCA-affiliated advisors as well as other advisors across the industry.
Advisor obstacles to providing retirement-income advice
For one, advisors are reluctant to provide retirement advice because there’s no consumer awareness of it. Some 65% of those responding the survey cite lack of consumer awareness as a key element of their reluctance to provide advice on retirement income.
What’s more, advisers say they aren’t focusing on this market because it’s time consuming. About two in three cite the time requirements of comprehensive retirement income plans as a deterrent to focusing on this market, says CA.
What are some implications of this? Many advisers will not look forward to telling clients that they will need to reconsider their lifestyle expectations in retirement, especially if the adviser managed the client’s portfolio during period of poor returns, CA says. “In addition, the overall complexity of comprehensive retirement-income planning serves as a major challenge to advisors addressing the retiree market,” CA says. “Unless an advisor makes an active attempt to involve other professionals, such as the client’s CPA, in optimizing a client’s overall retirement income plan, there is significant risk of investors presuming that the advisor is capable—and willing—to weigh all potential factors.”
Elements addressed in retirement-income plans
What factors do advisors need to address when building a retirement-income plan? Social Security (84%) and a client’s budget needs (77%) are the most-frequently considered factors in designing retirement income plans. Only 66% of advisors actively report that they consider the role of taxes in retirement income plans, CA says.
CA says advisors are generally aware that building a retirement-income plan is more difficult than building an accumulation plan. But they are often are “ill-equipped to discuss the cost of nuanced items such as health care.” Some six in 10 advisors say they healthcare planning as part of the overall retirement-planning process with clients, but “advisors often lack information to make accurate judgments to address clients’ concerns about healthcare costs.”
CA says advisors also need to plan to a mortality age, and they often do not have a good sense of what this end-date for a plan should be.
Sources of income
Somewhat surprisingly, survey respondents say Social Security is the leading source of retirement income across wealth tiers. “Even among the wealthiest households, Social Security accounts for nearly one-quarter of the retirement income stream,” Employer-based retirement accounts (21%), individual retirement accounts (14%), and annuities (7%) combine to account for 43% of overall retiree income, says CA.
According to CA, today’s retirees now are likely to draw income from a variety of sources, each with its own tax treatment and interactions with other sources. And that could mean, from my point of view, that advisors will need to become more expert in creating tax-savvy withdrawal plans.
Whatever you do, don’t lose my money. As clients age, CA says their priorities change and they face new problems and challenges. “The top goal of older clients who are working with an advisor is protecting their current level of wealth,” CA says. “Forty percent of households 65 or older cite this as their most important financial goal, compared to only 19 percent of their younger counterparts.”
What’s the implication? Advisors should not assume that older clients want a portfolio of jut bonds and cash, CA says. “Even though older clients state that protecting wealth is a leading financial goal, many will be disappointed if their portfolios do not match those of the broad equity markets,” CA says. To address these concerns, CA says “advisors must be sure to discuss the trade-offs necessary to balance risk and make clear the potential downsides of chasing market returns during an investor’s distribution years.”
Advisors report their highest contact levels with clients between the ages of 40 and 49, with an average of 18.5 annual contacts, CA says. However, contact levels of investors over age 70 nearly equal pre-age 49 levels as retirees begin to have more questions as retirement plans become reality.
That’s likely for a number of reasons: They have planning needs around health care, retirement income, and estate planning, and once clients retire, they have more time to spare. “While many advisors enjoy these conversations, the more-frequent communication can cut into an advisors’ time for other activities,” CA says. “Advisors need to be cognizant of their clients who take up a disproportionate amount of resources and work to keep client meetings to a regular schedule.”
Advisor use of retirement income products
Overall, CA says advisors are most likely to be using variable annuities (VAs) with living benefits and bond funds as part of their retirement income strategies (43 percent). However, use of these products is particularly concentrated in the independent broker‒dealer (IBD) and insurance channels. Meanwhile, advisors in the wirehouse and registered investment advisor (RIA) channels are far more likely to employ dividend-paying securities as their primary retirement-income tools within client portfolios, CA says.
What’s the implication? Well, there’s interest in guaranteed products, but there’s isn’t likely to be an increase in the uptake. “Though some academic studies have shown beneficial impacts to client portfolios through the use of insured solutions, cost and flexibility issues still weigh heavily in the minds of both advisors and clients,” CA says.
Advisor opinions of retirement-income funds
Advisors cite a variety of reasons for not using dedicated retirement-income funds but most commonly report that the funds simply are replicating what advisors already do themselves (53%), CA says. But to truly compete as wealth managers to retirees, CA says advisors and broker‒dealers must embrace the challenge of designing investment options for retirement income or be willing to risk losing assets to those who will.
Why don’t consumers talk to advisors about retirement?
“Nearly one-half of investors age 40–49 cite simply not getting around to it as a reason for not developing a retirement-income plan, CA reports. “By the time investors reach the 60–69 cohort group, developing a plan themselves becomes the most-common reason for not consulting a professional advisor.”
Given this, it could be difficult for advisors to attract new clients. Younger prospects will think retirement is too far away, while older prospects will think they don’t need advice. One solution, at least for older prospects, might be this: “Advisors must consider offering their recommendations as alterations to the investors’ current plans instead of complete replacements in order to acknowledge the time and effort potential clients have spent on their plans themselves,” CA says.
Total investable assets
When considered as a fraction of total U.S. investable assets, CA expects annual wealth-transfer rates to triple by 2036.
“Beginning around 2026, the first wave of baby boomers will enter their key wealth-transfer years,” CA says. “Households need help determining how to structure their estates and whether to transfer assets at death or during their lifetimes.”
Unfortunately, many advisors do not have the expertise to deliver a full estate plan, CA reports. And they should, though CA says, estate planning should be viewed as a retention tool rather than a client acquisition tool. CA notes that some advisors are trying to develop relationships with the children of their clients as a defensive measure, but this tactic is getting mixed reviews.
CA also reports that “households with between $2 million and $5 million in investable assets average more than $7 million in total assets at death. Of that amount, more than 72% generally makes its way to beneficiaries with just more than 15% allocated to taxes.”
The big takeaway from this finding? Advisors might want to consider offering charitable-giving services. Doing so “deepens the client relationships and also offers opportunities for advisors to take over management of clients’ foundation and endowment assets.”