As brokers and registered investment advisers brace for declines in fee income on the accounts of Baby Boom retirees drawing assets down, the head of Fidelity Investments' brokerage unit says "we don't know yet" how to deal with it - but that intermediaries must be flexible enough to adjust.
Ellyn McColgan, president of Fidelity Brokerage, told sister flagship publication American Banker in an interview that some RIAs would treat the movement of 76 million Baby Boomers toward retirement as an opportunity but that others would be absorbed if they are unable to make adjustments.
Fidelity, she indicated, has assured its ability to adjust by spending heavily on technological improvements ($700 million in 2004 alone).
The most difficult consideration for advisers, she said, is how they will get paid as customers retire and change from asset accumulators to asset spenders. Even in the latter mode, she said, retirees need advice on overseeing their assets.
"These conversations don't bring in assets, but they still take time," she said. "As the assets go down, the fees go down, and advisers are worried about how they are going to get paid."
'Stunningly Complex'"The truth is, I don't know," McColgan said. "We don't know yet, and they don't know yet. Retirees don't trade, and it is hard to find the commissions. I think the issues are stunningly complex."
One analyst says the answer to the adviser compensation problem lies in a change of orientation from asset management to wealth management.
Rus Prince, an investment analyst at Prince & Associates in Shelton, Conn., said that in the end investment advisers who change from asset managers to wealth managers will benefit from the resulting focus on a personal relationship based on devising and servicing a financial plan.
"Asset managers may be in trouble, but investment advisers that become wealth managers increase their income 35%," Prince said. "If your job as an adviser is to help solve financial problems and not to just sell products, you will do well going forward after your customers retire. If all you are concerned about are assets, then you will get clobbered."
Fidelity Brokerage and the intermediaries it works with plan to take advantage of the coming demographic movement and must be flexible to do so, McColgan said.
"Most of us have the same products we have always had," she said. "I think we all have to be a lot more creative and a lot smarter about the products we are offering. This is a lot bigger than most of us have given thought to yet."
"What we know how to do as an industry is, we know how to sell annuities, and we know how to sell bonds," she said. "We think there is an opportunity for advisers to think beyond that."
McColgan said advisers could offer more fee-based products such as wrap accounts, separately managed accounts and even unified managed accounts. Last week, Fidelity launched the first open architecture unified managed account through a partnership with Chicago's Envestnet Asset Management.
Advisers must seize the opportunity, as their customers move closer to retirement, to begin offering planning, she said.
"What we see from customers is that when they reach a certain age and a certain level of assets, they need asset planning, tax planning and health-care planning," McColgan said. "They are no longer worried about college for their children or their second home. They are worried about themselves. There is an opportunity for advisers and broker./dealers if they grab onto it."
(Wachovia announced Friday it is forming a retirement and investment products group to help customers plan for and live in retirement.)
Burton J. Greenwald, president, B.J. Greenwald Associates, agreed "there is a huge challenge coming and a huge transition coming. That transition is going to a be a difficult one for advisers and financial planners because until now they have been focusing on accumulating wealth, and now that accumulated wealth has to become an income stream."
Greenwald said this would require more sophistication from advisers.
'Massive Asset Reorg'"Advisers can still make money after [a customer's] retirement," he said. "There is a massive reorganization of assets that has to go on after retirement. Investors need advisers to convert growth investments into an annuitized income stream."
"The wave is coming," McColgan said of Baby Boomer retirements. "We only have five years to solve this. Within 10 years, you are going to be in it."
For advisers and broker/dealers to remain competitive, they must get smarter, she said.
"They have to manage their expenses," she said. "They have to get smarter about how many partners they can afford to pay and how many service providers they can afford. ... They have to drive down the costs of opening accounts. This is going to be a different ballgame."
McColgan said there are still plenty of inflows at Fidelity from new customers and from investors who roll their assets into Fidelity's retail business after retiring so that the giant Boston mutual fund company does not have an immediate worry. Last year, Fidelity added 375,000 customer households, up from 250,000 in 2003.
She said she thinks the trend toward consolidation in the brokerage industry will ultimately leave Fidelity among the few remaining players, with Schwab and the wirehouses. Intermediaries need to learn to work with companies like Fidelity, she said.
"Brokerage platforms are big and expensive and difficult to maintain," she said. "So, there are only a few players in this business, I think, who will be able to commit to it long-term and the enhancements you are going to have to continue to make in it to succeed."
McColgan said she believes Fidelity can be a leader in any business where it chooses to compete. Fidelity Brokerage increased its assets under management nearly 57% in the last two years, to $1.135 trillion, and the customer roster rose 17%, to 14.3 million.
Fidelity is encouraged by its recent growth but wants more and is willing to invest to get it, McColgan said. The company's $700 million technologicial enhancements investment last year, she noted, included $170 million on new projects.
"We are in the third year of a five-year growth plan," she said.