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New Trends in Serving Retirement Income Clients
Retirement Income Symposium
October 4, 2012 Boston, MA
GDC Research and Practical Perspectives
2
Focus of Today’s Discussion
• Success factors in serving retirement income clients
• Developing a more effective retirement income process and practice
• Managing key retirement income challenges
54%
43%
3%
Well Developed
Some But Not All
Limited/None
Retirement Income Processes and Capabilities
3
• No universal approach
• Advisors differ in processes and capabilities
• Two key segments emerge: Leaders and Laggards
Source: Trends in Advisor Delivery of Retirement Income - 2012
Key Differences of Leaders and Laggards
4
Source: Trends in Advisor Delivery of Retirement Income - 2012
HighModerateImpact Low Interest Rates
HighModerateDegree Client Concerns
“How” or approaches“What” or contentEnhanced Capabilities
More challengedLess challengedPractice Management
Mix of fees and commissionsFee-basedCompensation
LowerHigherAsset Consolidation
LowerHigherAverage Client Assets
LaggardsLeadersFactor
HighModerateImpact Low Interest Rates
HighModerateDegree Client Concerns
“How” or approaches“What” or contentEnhanced Capabilities
More challengedLess challengedPractice Management
Mix of fees and commissionsFee-basedCompensation
LowerHigherAsset Consolidation
LowerHigherAverage Client Assets
LaggardsLeadersFactor
5
Focus on Retirement Income Pays Off for Advisors
Change in Retirement Income Clients Served during 2011
Source: Trends in Advisor Delivery of Retirement Income - 2012
11%
59%
28%
2% 0.3%
Increased Significantly Increased ModestlyNo Change Decreased ModestlyDecreased Significantly
24%
45%
31%
Minimally EngagedTransitionalFully Engaged
Key Benefits of Working with Retirement Income Clients
6 Source: Trends in Advisor Delivery of Retirement Income - 2012
28%
67%
43%
64%
14%
43%
27%
46%
77%
67%
83%
30%
65%
46%
0% 20% 40% 60% 80% 100%
Easier to Retain
Consolidate Assets
More Assets
Value Advisor/Services
More Profitable
Higher Average Assets
More Referrals
Minimally Engaged Fully Engaged
Advisors by Focus on Retirement Income Clients Retirement Income Practice Benefits
Percentage of clients near or in retirement
7
Success Factors
Commitment -serving retirement income clients is a core component of their practice
Well-Defined Processes –enabling them to efficiently support a rising number of retirement income clients
Planning orientation –providing a solid foundation and road map for support
Holistic perspective –going beyond investment management in the services they deliver
Educational –informing clients on the issues and challenges they will face in retirement
Customization –tailor support to specific client circumstances and needs and follow a consistent methodology for engagement
Relationship focused –taking a long-term rather than transactional approach to support
Source: GDC Research and Practical Perspectives
Components of the Retirement Income Process
Developing Retirement Income Clients
Retirement Visioning and Client Discovery
Creating & Managing Retirement Income
Plans/Portfolios
Monitoring, Review & Adjustment
• Positioning with new & existing clients • Communicating your process & services
• Obtain expressed and unexpressed needs/expectations
• Philosophical approach in creating income • Investing for longevity, inflation, health care,
etc.
• Ongoing support • Monitor changes, especially the first 2 years
8 Source: GDC Research and Practical Perspectives
Elements of Discovery
9
“Retirement distribution planning is clearly a
process and one that requires the advisor to
be very skilled at putting issues in the right
context. It is crucial to figure out what the
client needs and wants, otherwise the effort is
meaningless. A major skill is getting people to
express their unexpressed expectations and
help them address issues that have not been
well-thought-out. Dialogue and conversation
around what retirement looks like for the client
are crucial.”
Source: GDC Research and Practical Perspectives
Advisor Quote
• Help clients articulate unexpressed concerns
• Place issues in the right context
• Identify needs vs. wants
• Create a vision and a plan for living in retirement
• Include Spouse and family in the discussion
Expanding Services and Support
CORECORE
Nursing Home Selection
Family Counseling
CareerCounseling
Funeral Arrangements
InvestmentPlanning
Mortgages
EstatePlanning
Tax Mgmt.
Insurance
RiskMgmt.
RetirementPlanning
TravelServices
Relocation
HealthCare
Elder Care
Social Security
Personal Development
CORECORE
Nursing Home Selection
Family Counseling
CareerCounseling
Funeral Arrangements
InvestmentPlanning
Mortgages
EstatePlanning
Tax Mgmt.
Insurance
RiskMgmt.
RetirementPlanning
TravelServices
Relocation
HealthCare
Elder Care
Social Security
Personal Development
10
Non-traditional services becoming a differentiator
Source: GDC Research and Practical Perspectives
12%
25%
18%
67%
53%
51%
40%
12%
6%
18%
14%
21%
27%
33%
51%
44%
26%
6%
9%
14%
20%
19%
42%
64%
17%
9%
7%
29%
23%
3%You manage virtually all of their assets
You have all of the resources you needto service them
You know what their monthly expensesare
They have a comprehensive financialplan with you
You have done a formal budget withthem
They need to take income out of theirinvestments periodically to help pay for
their living expensesThey often have unexpected
withdrawals that can undermineincome planning
They have a high risk of running out ofmoney in retirement
All of them Most of them Some of them A few of them
Working with Retirement Income Clients
Statements Regarding Retirement Income Clients
11 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.
40%
29%
26%
24%
22%
18%
5%
25%
34%
28%
31%
32%
26%
33%
24%
25%
34%
27%
37%
32%
43%
Financial planning software
Questionnaires
Non-formal tools (e.g., "yellow pad" of paper)
Monte Carlo or other projection analysis
Worksheets
Frameworks or software that analyze a retirementincome client's needs and recommend appropriate
products to meet those needs
Client marketing and sales materials
Rely on strongly Use often, but do not rely on strongly Use occasionally
Tools and Software Used in Retirement Income
12 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.
What Retirement Income Philosophies Are Being Employed
13 Source: Trends in Advisor Delivery of Retirement Income - 2012
• Income Floor is growing while fewer advisors using Risk-adjusted Total Return method
34%
31%
35%Risk-AdjustedTotal Return
Pooled
Income Floor
Retirement Income Philosophies
• Emphasis on diversification and performance similar to how assets assets are managed for pre-retirees although generally with a more conservative, risk aware approach
-
• Assets draw down as a percentage of the portfolio that reflects client needs and circumstances, generally between 3% and 5%
• Portfolio not generally managed with income as a specific investment objective
• May create short-term reserve account to manage cash flow needs
• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities used more selectively
• Emphasis on establishing different pools of assets each with a different objective, time horizon or duration, and risk/return profile
• Generally invest in different pools or buckets with progressive five year durations and increasingly aggressive risk/return parameters
• Specific short-term pools established to generate income irrespective of current market environment
• Longer-term pools – those with a horizon of ten years or more –Invested to sustain portfolio purchasing power over time
• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles often used as core portfolio components
Total Return Philosophy Pooled Philosophy
• Emphasis on satisfying the minimum income needs of the client through a low-risk strategy, while managing the remainder of the portfolio to satisfy client “wants”or discretionary requirements depending on portfolio returns
• Generally carve out a specific portion of the portfolio to deliver consistent income to satisfy client cash flow needs no matter how the capital markets perform
• Remainder of portfolio is invested in a broadly diversified portfolio designed for total return within the risk parameters of the client, with excess returns beyond agreed upon targets harvested to meet discretionary spending desires
• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles used as core components for the income floor portion of the portfolio
Income Floor Philosophy
• Emphasis on diversification and performance similar to how assets assets are managed for pre-retirees although generally with a more conservative, risk aware approach
-
• Assets draw down as a percentage of the portfolio that reflects client needs and circumstances, generally between 3% and 5%
• Portfolio not generally managed with income as a specific investment objective
• May create short-term reserve account to manage cash flow needs
• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities used more selectively
• Emphasis on establishing different pools of assets each with a different objective, time horizon or duration, and risk/return profile
• Generally invest in different pools or buckets with progressive five year durations and increasingly aggressive risk/return parameters
• Specific short-term pools established to generate income irrespective of current market environment
• Longer-term pools – those with a horizon of ten years or more –Invested to sustain portfolio purchasing power over time
• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles often used as core portfolio components
Total Return Philosophy Pooled Philosophy
• Emphasis on satisfying the minimum income needs of the client through a low-risk strategy, while managing the remainder of the portfolio to satisfy client “wants”or discretionary requirements depending on portfolio returns
• Generally carve out a specific portion of the portfolio to deliver consistent income to satisfy client cash flow needs no matter how the capital markets perform
• Remainder of portfolio is invested in a broadly diversified portfolio designed for total return within the risk parameters of the client, with excess returns beyond agreed upon targets harvested to meet discretionary spending desires
• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles used as core components for the income floor portion of the portfolio
Income Floor Philosophy
14 Source: Trends in Advisor Delivery of Retirement Income - 2012
15
Product Integration Mix
Portfolios tend to include a mix of different solutions, with multiple vehicles used
Percent allocated to vehicle for typical retirement income client
40%58%
22%11%
41%19%21%
48%5%
47%12%
42%31%
59%63%
32%43%47%
35%21%
45%45%
13%8%
14%11%
18%23%23%
12%38%
6%33%
5%
6%15%
8%16%16%
5%37%
10%
2%
2%
0% 20% 40% 60% 80% 100%
Closed-End FundsStructured Products
AlternativesCash/Money Market
SMAsIndividual Securities
ETFsIndex Funds
Actively Managed FundsSPIA/Income Annuity
VA
None Low Medium HeavySource: Trends in Advisor Delivery of Retirement Income - 2012
Expected Change in Vehicles Used
16
Expectation of continued shift to VAs, ETFs and actively managed funds during the coming 12 to 24 months
20%18%
29%19%21%
31%28%
13%34%
25%42%
26%32%
18%21%
26%20%
17%28%
11%21%
11%
0% 10% 20% 30% 40% 50% 60%
Closed-End FundsStructured Products
AlternativesCash/Money Market
SMAsIndividual Securities
ETFsIndex Funds
Actively Managed FundsSPIA/Income Annuity
VA
Increase DecreaseSource: Trends in Advisor Delivery of Retirement Income - 2012
Impact of Challenging Environment
Source: Trends in Advisor Delivery of Retirement Income - 2012
40%
45%
13%2%
Significant Moderate
Minimal No
23%
56%
19%2%
Significant Moderate
Minimal No
Impact of Low Interest Rate Environment Impact of Market Volatility/Risk
17
Top 5 Actions Taken
Source: Trends in Advisor Delivery of Retirement Income - 2012
18
Low Interest Rates Market Volatility
1 Increased Dividend Paying Equities Increased Dividend Paying Equities
2 Increased Guaranteed Solutions Increased Guaranteed Solutions
3 Increased Higher Yield Increased Alternatives
4 Increased Alternatives Increased Higher Yield
5 Increased Non-Traditional Income Solutions Increased Cash Allocation
Top Concerns in Serving Retirement Income Clients
19 Source: Trends in Advisor Delivery of Retirement Income - 2012
69%
53%
67%
68%
59%
52%
57%
56%
21%
30%
22%
20%
28%
31%
25%
30%
9%
17%
10%
12%
12%
18%
17%
14%
0% 20% 40% 60% 80% 100%
Generating Long-term Income
Generating Short-term Income
Managing Risk/Volatility
Managing Client Fears/Expectations
Educating Clients on Realities
Asset Allocation
Finding Investment Products
Preventing Client Overspending
Concerned Neither Unconcerned
Practice Management Challenges in Serving Retirement Income Clients
20 Source: Trends in Advisor Delivery of Retirement Income - 2012
40%
35%
19%
4% 2%
Strongly Agree
Somewhat Agree
Somewhat Neither
Somewhat Disagree
Strongly Disagree
Interest in New Approaches
21 Source: Trends in Advisor Delivery of Retirement Income - 2012
Advisors are open to new ideas including products and services
But Support Providers Don’t Get High Marks
38%
30%
18%
19%
15%
18%
11%
13%
50%
42%
43%
41%
44%
30%
38%
39%
10%
22%
32%
28%
34%
37%
43%
34%
1
2
3
4
5
6
7
8
9
10
11
Excellent Very Good Fair
Knowledge of their own products or solutions
Wholesalers
Broker-dealers/custodians
Knowledge of retirement income planning issues and strategies
Wholesalers
Broker- dealers/custodians
Knowledge of competitor products or solutions
Wholesalers
Broke- dealers/custodians
Understanding of your practice and your retirement income approach
Wholesalers
Broker-dealers/custodians
Advisors Ratings of Retirement Income Support
22 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.
And There Is Room For Improvement
20%
18%
10%
18%
12%
16%
7%
20%
8%
16%
45%
41%
34%
34%
32%
34%
34%
35%
26%
31%
29%
31%
42%
36%
47%
36%
47%
32%
51%
40%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Excellent Very Good Fair
Providing marketing or sales ideas
Wholesalers
Broker dealers/custodians
Providing training or certification
Wholesalers
Broker dealers/custodians
How to build and manage more effective retirement income portfolios
Wholesalers
Broker dealers/custodians
Practice management assistance
Wholesalers
Broker dealers/custodians
Helping you build a retirement income practice
Wholesalers
Broker dealers/custodians
Advisor ratings of support capabilities
23 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.
3%
7%
15%
11%
17%
23%
82%
80%
62%
0% 20% 40% 60% 80% 100%
Retainer
Hourly
Planning
Frequently Occassionally Infrequently/Never
Advisors Need Balance Capacity and Compensation
Source: Trends in Advisor Delivery of Retirement Income - 2012
• Retirement income support takes more time, especially client service and support • Advisors are providing more advice, but advice based compensation is underutilized
Client Service 29%
Investment Research/Portfolio Creation 14%
Prospecting/Marketing 13%
Rebalancing/Portfolio Oversight 12%
Financial Planning 11%
Compliance 6%
Estate Planning/Insurance/Non-Investment 6%
Budgeting/Income Management 4%
Staff Management 4%
Other 2%
Use of Alternative Fees Time Spent on Key Functions
24
25
Dennis Gallant, President GDC Research (781) 314-0606 office (508) 397-9296 mobile [email protected] www.gdcresearch.com
Contact Information
Howard Schneider Practical Perspectives (978) 590-7290 [email protected] www.practicalperspectives.com
Retirement Income Research • Advisor Best Practices in Delivering Retirement Income & Transition Support (Q3 2008)
• Examining Best Practices in Constructing Retirement Income Portfolios (Q2 2009)
• Update: Advisor Best Practices in Retirement Income (Q4 2009)
• The Continued Evolution of Retirement Income Delivery: An Analysis of Leading Practices in Advisor Support (Q2 2010)
• Trends in Retirement Income Delivery: Advisor Portfolio Construction, Product Usage, and Sales Support (Q2 2011)
• Trends in Advisor Delivery of Retirement Income (Q1 2012)
• The Current State of Retirement Income Sales Support (Q2 2012)