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Does the scenario below sound likely? If so, you are among the thousands of RIAs who are likely to lose significant assets over the next decade.
Gretchen is a 68-year-old widow seeking a new financial advisor. After a brief phone call, she is about to meet Matt, a 54-year-old sole practitioner RIA, for the first time. Seven months ago, Gretchen’s husband of 42 years, Paul, passed away after a two-year battle with cancer. Recently, Gretchen decided to sever the relationship with her previous financial advisor, Steve. Over 18 years, Gretchen perceived that Steve’s focus was consistently centered on Paul. Because Paul appeared satisfied with Steve’s performance, Gretchen made no attempt to dislodge the relationship.
But she never liked the way Steve made her feel.
In their numerous meetings, Gretchen would come away feeling that Steve’s focus and dialogue were overwhelmingly aimed at Paul. Steve came to each meeting with plenty of paper and a computer showing numerous tables, charts, graphs, and statements. Gretchen would find herself nodding as Steve spoke, while at the same time thinking that he never demonstrated any interest in her as an individual or her concerns.
More than once, Gretchen said to herself, “He knows about our money, but he knows nothing about me.”
Gretchen is determined that her next relationship with a financial advisor will be different. As she takes a seat in Matt’s small conference room, Matt says:
Gretchen, thank you for the opportunity to meet in person. I was sorry to learn of your husband’s passing. Tell me, how are your children handling things?
Before replying, Gretchen is surprised, but pleasantly so, that Matt’s first question doesn’t address her finances.
Well, it’s been difficult for all three kids, especially for my youngest, Katie. We had Katie later than our two boys. She has just graduated from Bucknell, but she’s still finding it hard. Thank you for asking about them, Matt.
“Of course, Gretchen. How about grandchildren?”
“I have three, all boys, Kyle, Joshua and Henry. Kyle is three, Joshua is four and Henry is seven.”
“Are they nearby? Do you get to spend time with them?”
“Thankfully, they all are close. My boys and their wives have been great through the entire period of Paul’s illness and since he passed. I am truly blessed.”
“Gretchen, what’s important to you at age 68? Apart for your family, what do you value? For example, are there any causes that are especially important to you? Or charities that you wish to show support? I’d like to know what your heart tells you to prioritize.”
As Gretchen contemplates Matt’squestions, she is having a simultaneous conversation with herself:
Wow, he sincerely cares. And really listens. He has genuine interest in my values, and he wants to understand what I believe is important. I’m already confident that I can build an authentic relationship with Matt. I found my financial advisor.
This is the conversation that made Gretchen Matt’s client. Matt will manage her $1.45 million. Never once were investments mentioned. No discussion took place about model portfolios, historical performance, or fees. Those issues will be addressed in a subsequent meeting. For now, Matt knows that he has a new client, and that her priority is monthly income.
Why RIAs are unprepared for retirement income planning
RIAs are the fastest growing, most dynamic and attractive channel to product manufacturers of all stripes. Yet, it is the least prepared to serve the retirement planning needs of millions of Americans. The channel’s growth has been immeasurably aided by the unprecedented 14-year period of appreciating asset prices. While I can’t predict what’s ahead, I have a keen sense that we are about to enter a new era in personal finance that will be noteworthy for its focus on risk mitigation.
It’s hard to argue anything else.
Stock prices are dropping, interest rates are rising, inflation is surging and, as I like to say, “the Fed is purging.” It’s signaled its intent to wrap-up QE in March in favor of a money-supply-shrinking program of quantitative tightening. We’ll see what happens.
Let me address what we can count on: demographics. Gretchen’s example above is but one of millions that will play out over the next few years. As their husbands pass, “boomer” women will control $30 trillion in assets. You already know this. But consider the scale of those assets versus the size of the RIA channel. Women will control a volume of money that is about 575% larger than the entire channel oversees currently.
And there’s something else.
You are not prepared (I’m speaking to you, Mr. stereotypical RIA). Take it from me. You’re not. I’ve spent 18 years in the business of retirement-income distribution planning. I know of what I speak. The reason you are ill-prepared- and are likely to lose significant assets is because your investment worldview is ideal for capital growth, but wrong for income distribution. You default to withdrawal strategies that lack vital risk-mitigation properties, and you place too much confidence in ”confidence rates.” As I explained in that Advisor Perspectives article, there is no “safe withdrawal rate.”
Unless you make some significant adjustments, including moving past your historical objections to lifetime-guaranteed income, you should not feel confident about holding on to a sizable portion of your AUM. Moreover, you should not feel optimistic about winning ‘boomer” female clients. Those setbacks can be entirely avoided, however, if you are willing to expand your thinking and practices as they relate to retirement-income planning.
Changing your thinking begins with an appreciation for the most important concept in retirement-income planning: the constrained investor. I’ve written about this several times, but I cannot make the point often enough. In the context of income planning for “boomer” women, failing to follow the constrained investor planning construct is reckless in term of compliance with your fiduciary duty as well as in retaining retiree clients.
Let’s go back to Gretchen and see what Matt did to address her retirement income needs. His planning approach is exactly the right one for a client like Gretchen.
Apart from her $1.45 million, Gretchen has begun receiving retirement benefits from Social Security equal to $1,670 per month. Gretchen craves financial security in retirement. One reason is that she knows what it’s like to live a long time in retirement. During the three years prior to her mom’s death at age 95, Gretchen was deeply involved with her care. It’s not lost on Gretchen that she could live as long as her mom or longer.
Gretchen expresses to Matt that she is concerned about having income that continues throughout her life. She also agrees with Matt’s assertion to have some of her money exposed to risk over the course of her retirement – market participation that will persist for decades given Gretchen’s good health and family history. However, Gretchen also stipulates something that is tremendously important to her: She must have an income of at least $6,700 per month.
After discussing what’s behind this number, Matt concludes that this represents what Gretchen requires to fund her minimally acceptable lifestyle.
Matt’s first task is to determine where Gretchen should be placed in the constrained investor three- segment framework for categorizing retiree investors:
1. Overfunded investors
2. Underfunded investors
3. Constrained investors
When we subtract Gretchen’s Social Security income from her required monthly income, we arrive at Gretchen’s “income gap:”
Required Income – Social Security = Income Gap
$6,700 - $1670 = $5,030
The income-to-assets ratio
The income-to-assets ratio is an uncomplicated method to determine if an individual is a constrained investor. Divide the annual income required to be produced by savings by the total amount of savings available to produce income. If the resulting percentage is 3% or more, the individual is a constrained investor. In Gretchen’s case, she needs her savings to produce $5,030 x 12, or $60,360, annually:
$60,360 ÷ $1,450,000 = .0416, or, 4.16%
4.16% is greater than 3%, making Gretchen a constrained investor. Matt‘s first order planning priority is risk mitigation. He must build an investing strategy that manages timing and longevity risk. This will require balancing safe investments with other investments that he will manage and that will be durably exposed to market participation.
(A side note: I fear for constrained investor’s retirement security due to the fact that so many are not protected against timing risk. You are doing God’s work when you help people mitigate this risk. To explain the issue in simple-to-understand language, I wrote an e- Booklet, Timing Risk: An Overview for Investors. You can download a free copy here.)
Back to Matt and Gretchen. Matt prepares a PowerPoint slide for Gretchen. The slide outlines the 10 strategic objectives of her personal income plan.
10 strategic objectives of Gretchen’s plan for retirement income:
1. Understandable
2. Confidence-building
3. Defines the objectives
4. Mitigates the risks (timing, inflation, longevity) that threaten to reduce monthly income
5. Balances safe investments and equity exposure
6. Creates a framework for long-term investment discipline
7. Provides safe monthly paychecks all through retirement
8. Adds a lifetime income annuity that protects Gretchen’s longevity risk
9. Provides $6,700 required minimum income even if investments sub-perform
10. Delivers lifetime inflation-adjusted income if reasonable ROR targets are attained
Ask yourself how a constrained investor like Gretchen would react if it were you showing him or her this slide. Would the prospect be impressed? Feel that it directly addressed his or her concerns?
I can sum up the prospect’s emotional response in one word: confidence.
Matt is communicating to Gretchen the type of value proposition that a seasoned expert in retirement-income distribution planning will routinely show to a constrained inventor. It’s a strategy that will win virtually 100% of the time. It also happens to be the perfect strategy for most female “boomer” clients – the ones with the trillions of dollars.
RIA: Don’t lose, win
To you, Mr. stereotypical RIA, I say, “It’s time to broaden your perspective on retirement-income planning. Read the research on women’s investing preferences. Understand that ‘security’ is more important than ‘prosperity,’ and ‘outcomes’ mean more than ‘probabilities.’”
When I entered the retirement-income field in 2004, “money in motion” was the hot talking point. The big insurers and asset managers were giddy over the “Holy Grail” profit opportunity they foresaw resulting from “boomer” asset consolidation. The executives of those companies understood that the advisor who took care of the client’s income distribution needs properly would never be replaced by another advisor. This is the business opportunity I saw that caused me to shift the focus of my company toward building retirement-income planning platforms.
My experience over the past 18 years has shown that the executives were right. I’ve seen thousands of instances of income-focused advisors taking assets away from accumulation-focused advisors. This is the real-world phenomenon of what I call the “last and durable advisor.”
We face parallel phenomena. Women are gaining control of trillions of dollars and are firing incumbent male advisors in seven out of 10 instances. The cards are stacked against accumulation-focused RIAs. Eighteen years of loyal service and excellent performance didn’t preclude Gretchen from terminating Steve.
Don’t suffer Steve’s fate. Following the constrained investor construct is tantamount to owning a call option on client and asset retention – and the key to attracting new retiree investors to your practice.
Wealth2k® founder David Macchia is an entrepreneur, author, and public speaker whose work involves improving the processes used in retirement income planning. David is the developer of the widely used The Income for Life Model®, and the recently introduced, Women And Income®. David has authored many articles on the subjects of retirement income planning and financial communications. He also wrote the consumer finance book, Lucky Retiree: How to Create and Keep Your Retirement Income with The Income for Life Model®. Constrained Investor is a registered trademark of David Macchia.
Read more articles by David Macchia
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
