Twenty trillion dollars is roughly the amount of money that retirees in coming years will be drawing down; but no one has figured out the best ways financial advisors can help them do that.
As Francois Gadenne, founding chairman of the Retirement Income Industry Association, frames it: "Advisors are sitting between chairs. Try it. It doesn't work very well. We are at the point in our industry, in our businesses, when the ground is shifting under us." [See profile of Gadenne on page TK.]
Gadenne, speaking at RIIA's annual meeting and awards dinner in Cambridge, Mass., in September, didn't mince words.
"Think evolution. Think adaptation. Think new ideas," he told the audience, which included, among others, advisors, plan sponsors, product manufacturers, academics, researchers and technology providers. "What are the strategies outside the single big bet in your silos? That's where the solutions lie."
The shift from asset accumulation to income distribution comes with huge stakes — for just about everyone.
But, as Rick Miller, who heads Sensible Financial Planning in Cambridge, notes: "Academic consensus has yet to emerge. Advisors are still flailing about. Product solutions are incomplete. Our clients are confused — and they are terrified about this."
New research from Financial Research Corp. indicates that 75 percent of firms sampled would like to have a retirement income methodology "at some point" that addresses the question: How do I generate income in retirement off of the assets I have accumulated?
The research study, "Building & Positioning Retirement Income Solutions," also compares the attitudes of 30 respondents, representing $15 trillion in assets, on product development opportunities. The results of the study, some of which were previewed at RIIA's conference, are telling.
In 2005, 44 percent of firms said they were working on developing non-insurance approaches that guarantee income. By 2007, the number had jumped to 71 percent. A hike was also registered with firms focusing on principal-protection products, 67 percent to 83 percent. Likewise, there was a spike in the development of automated processes for mutual funds with planned distribution: 67 percent to 85 percent.
While the retirement income market stands at just $2 trillion today, Financial Research Corp. research partner Laura Varas estimates it could amount to as much as $7 trillion, or 30 percent of U.S. household investable assets, 15 years from now.
"This is akin to the early days of the 401(k) when you were counting sponsors on one hand," said Varas. "It's early, yes, but a lot of advisors are already tackling this. As often happens, the people in the field are kind of the first to know. What I do hear advisors saying is they don't want to be pitched on a fund, even if you name it the "Retirees' Diversified Income Fund." It could be part of the solution, but the big idea is to have a planning process that hopefully doesn't take too much time that answers the question: How does the customer draw down his assets? That's where the leading thinking has to take place."
Advisors Sound OffWhen strategic marketing consultant and RIIA board member David Macchia, CEO of Wealth2K, introduced certified financial planners Phil Lubinski and Briggs Matsko at the conference, he called them "income pioneers" whose clarity of ideas and tested income-distribution methodologies have resulted in clients who can say with confidence: "Just take care of me."
But, Macchia added: "That's just not practical for 97 percent of advisors today."
The two advisors have differing methodologies: Simply put, Lubinski's Income for Life Model is a segmented asset-class strategy that places a heavy emphasis on guaranteed streams of income that continue over long periods of time. Matsko's pyramid-shaped Retirement Income Matrix links particular funding sources to particular expenses.
Notably, both Lubinski and Matsko said that while industry leaders are talking about building multiple, process-driven solutions, that is not the message they are hearing from wholesalers in the field.
"What the CEOs are saying is that they understand that no one of them has a single solution to retirement income, but that collectively they do. Yet their wholesalers are basically coming into advisors' offices with a single solution: 'Here's my deal and here's why my rider is better than their rider.' Frankly, they're not bringing anything other than product features and they all look alike," says Lubinski, who heads First Financial Strategies in Denver. "We don't need product features; we need strategic solutions."
Lubinski, in fact, is calling for a dramatic change in the wholesaler/advisor relationship.
"We've got to get away from the product relationship to a business partner relationship. It needs to be consultative," he says. "Unfortunately, it's talked about in theory, but no one has taken the first step."
Matsko, who has a large practice with Lincoln Financial Advisors in Sacramento, says the fundamental problem is that manufacturers have typically produced products that clients are expected to adapt to — rather than creating a process-driven approach where the product adapts to the client.
"If I'm doing the right job, I'm really running you through the process, and that process may or may not include a product sale," says Matsko. "There's just this huge disconnect between manufacturers and the soldiers in the trenches."
Hopefully, manufacturers are listening.
At the moment, however, only 25 percent of advisors believe product providers are doing a good job helping them with effective retirement-planning tools and products, according to an advisor attitude survey released at the conference.
As RIIA membership co-chair Elmer Rich, principal of Chicago-based strategic marketing advisor Rich & Co., put it: "Financial advisors are saying they don't want more product. We're seeing….resistance. There's a lot of impatience and discouragement with what they're getting from wholesalers. They're getting products that are thrown out, not thought out — and there's no educational component involved. They're saying don't bring me any more poor products."
A Look AheadIt's been called a "war," a "battle," even an "arms race" — and one thing is certain: The contest for winning retirement income solutions is going to be crowded and competitive.
"We're at the front edge of the demand for retirement income products, simply based on demographics. But you can bet there are people out there in their product labs who are thinking about all this right now," notes Bob Padgette, managing director of Klein Decisions, a Raleigh, N.C.-based software company that develops financial-decision tools. "I think all of our traditional thinking about an income product will have changed significantly five years from now. Advisors are really going to need resources that can help them adjust their business model to one that deals more with distribution-type issues and distribution-type investments."
