Article originally published in Investment News
July 2007


Three Things Baby Boomers Won't Tell You

By Steve Gresham
July 23, 2007
Conventional wisdom suggests that the wave of retiring baby boomers will extend the salad days of the financial advice business. Not so fast. The protracted and painful 25-plus-year decline of the North American automobile industry provides a somber warning to the full-service financial advice business: adapt to the changing needs of the baby boomer age wave or face extinction.

Opportunities abound for entrepreneurs willing to listen and respond to changing consumer preferences — every generation expects to have things “their way.” But as the Big Three automakers learned too late, ignoring change drives away potential customers and opens the door to competition.

Baby boomer households are wising up to the challenges of their future — call it retirement or not — and they are beginning to sense their vulnerability. As the oldest baby boomers are just 61, we still are very early in the contest for their final advisory relationship. So with the benefit of a two-year research project conducted among top advisory firms across the United States and Canada, I offer here three attitudes pre-retiree households are expressing now and will be addressing more as they confront the reality of a protracted retirement. Our responses will determine our success in providing solutions:

1. “I’m pretty sure I don’t have enough money, but I’m not sure I want to know the bad news.”

Reality check: What’s your “number” for retirement comfort? Among millionaires, 60% have less than $2 million in stated net worth, exclusive of the value of their primary homes, according to the 2007 Phoenix Wealth Survey, and most of those households have dramatically miscalculated their wealth, simply because they have not fully examined the effect of their future liabilities and risks.

For example, longevity drives retirement expenses for simple living costs — and most families underestimate how long they will live. A typical North American couple, each 65, has a 50% chance of one spouse living to 92 and a 25% chance of one reaching 97, according to research by the Employee Benefit Research Institute in Washington. Funding a 32-year retirement with $2 million or less today is possible, and 75% of the retirees probably won’t have that long a time frame, but how do you know?

Health is the second factor most affecting retirement income needs, escalating the costs of daily living at rates much higher than overall consumer inflation. Third on the list of retirement net worth traps is the tendency to overstate assets, such as carrying retirement plans at pretax value or depending on real estate to maintain its price 20 to 30 years out (36% of millionaires in the Phoenix Wealth Survey said their house was a meaningful part of their retirement income plan).

A second aspect of income statement planning is that several of the most significant retirement expenses are incurred near the date of retirement. The financial “sandwich” of simultaneous demands from aging parents and adult children is caused by really big expenses incurred very early in the retirement years. A majority of boomers say they expect to work in retirement — call it Plan B — but most squander the opportunity to leverage their greatest lifetime asset, their expertise. Instead of working in advance to convert their occupation into a part-time retirement income supplement, current evidence indicates a greater likelihood that retirees will become exactly that — at least upon initial retirement date — as they embrace the opportunity for travel and other activities they denied themselves in the working years.

The rub is that many attempt to return to their profession in search of a retirement job but learn too late that the world has moved beyond their expertise, and they are not current. The job should be regarded as an asset class — to be reduced but not sold.

What to do now:

Every client needs an evaluation of their future — not from the perspective of formalized financial planning with a hodgepodge of modern-portfolio-theory solutions but from a common-sense outline of what the family will look like and who will be responsible.

Help clients develop retirement income solutions not just from investments but from expertise and experience. Convert the full-time job into an asset that generates income.

Insulate clients from the “contingent liabilities” associated with adult children and aging parents. Trusts for both generations provide limits and manage expectations. Baby boomers’ legendary confidence and “live for the moment” generosity will undermine their ability to sustain themselves in retirement.

2. “I want my retirement income, and I don’t care where it comes from.”

Reality check: With so many investors entering the public markets during the bull market, it is quite possible that the majority of equity owners have not made a net return over the past six to eight years. That being the case, where is the credibility of the financial services industry to create what boomers will insist upon — dependable long-term retirement income?

What to do now:

Dependable income strategies with principal and income guarantees will be table stakes, while the process of generating the income will fade in importance. Marketing replaces “ordinary” investment management. Good packaging will be more important than the underlying contents. Witness the $60+ billion that flowed into life cycle funds in 2006 — a year when net flows into domestic-equity funds were flat. The target date fund is a marketing coup, with the same definitive promise as the old zero-coupon bonds that investors snapped up in the 1980s to fund education needs.

Brand counts. With unprecedented longevity of retirement life comes the need for security about retirement income sources. A study by Moss Adams LLP of Seattle suggests that 62% of top advisers are 55 or older, and their clients are of similar age. Outliving your adviser is not a palatable option for retirees, so they will seek comfort with institutions — just as they have in selecting estate trustees. Which companies will make a commitment to a retirement account that can live on past the adviser?

Individual products such as stocks, bonds, funds — even annuities — proliferate despite the lack of credible evidence of demand among consumers for such a varied menu.

If the primary goal of all households is a comfortable retirement, why are we making it so complicated?

3. “I don’t need a financial adviser; I have a pharmacist.”

Reality check: For all the industry hype about optimized investment solutions and modern portfolio theory, the fastest-growing financial product in retirement plans is the ultimate package, an automatically maturing diversified mutual fund available in specific target maturities — the life cycle fund. Originally ridiculed by the industry when first introduced during the bull market 1990s, life cycle funds are now the default vehicle in a growing number of 401(k) plans.

The baby boomer generation is the first to grow up with the ability to get help from sources other than specialists. For example, parents of boomers were able to buy from a drug store or pharmacy over-the-counter medications to address many of life’s pesky illnesses and injuries.

Better education and media distribution created more awareness, and now an entire generation can go to a physician only when there is a real problem. Is this not the fate of the financial advice business, which provides many of its products online and in company retirement plans — with the endorsement and encouragement of employers?

If everything an investor needs to self-administer a retirement income program is available on the web, when would the role — and the expense — of a financial “doctor” be required?

The financial adviser of the future faces an interesting conflict driven by the aging boomer population: Revenue from assets declines as they are distributed to clients, while the complexity of client needs increases. The accumulation client is easy — few demands, looking forward to retirement — but much more demanding as they reach the income stage. One adviser group we know is bogged down with finding health insurance for clients, while another is working on protection from identity theft.

These real-world concerns of aging clients are important but time consuming, and the adviser is dealing with razor-thin margins, compared with the heady returns of an asset management account.

Add to this mix the difficulty advisers face in finding people to fill the expanded customer service roles implied by the growing complexity of client service needs.

The picture is gloomy for a practice facing lower revenue per client but higher costs. Without a more solid customer service capability, folks managing portfolios today may soon find themselves drowning in service minutiae.

What to do now:

Every client household should complete a “risk audit” outlining their points of vulnerability. Top advisers must be ahead of their clients, just as a good physician would warn of future health risks based on current lifestyle choices. Foreshadowing the future is the role of an insightful and trained professional — who should be comfortable charging for that role.

The financial services industry needs to continue “unbundling” fees for advice from fees for product. Paying a higher rate for a fund is legitimate in the long run only if the client is made aware repeatedly that the extra cost is for legitimate services rendered on a wealth management basis. Otherwise, every adviser is vulnerable to losing clients who are “made aware” of the extra cost by some well-meaning friend or ambitious competitor.

Go for the assets — at all costs. The real battle for the boomers will be fought not over what they would like to have but what they have to have. Whether they pick their own securities or leave it to us, they have to keep their stuff somewhere. Custody is our primary objective.

Several far-sighted organizations are borrowing the oldest trick in the book — offering that which costs almost nothing in order to get the prize, which is the assets. Banks used to give out toasters. One big firm advertising herein offers a driver and a wedge. More than one bank will let you trade for free. It’s working.

Aggregation for simplicity, pricing for value, not products, dependability of income and protection against risks: Common-sense solutions rule the future of financial advice, and to the “listeners” go the spoils.

Steve Gresham is executive vice president and director of retail markets at Phoenix Investment Partners Ltd. in Hartford, Conn.



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