The financial services industry is facing a test, in the form of 78 million retiring Baby Boomers. Every company wants to pass with flying colors, but providing retirement income is a different proposition from planning for retirement. Mutual fund complexes, insurance companies, banks, institutional money managers and broker/dealers all offer competing products and services: individual securities, mutual funds, separately managed accounts, hedge funds, annuities, life insurance, long-term care insurance and banking.
Which of these products are investors going to need to manage their retirement effectively?
The answer to this particular multiple-choice question is "all of the above," so it is becoming clear to different product manufacturers and distributors that retiring clients are going to need more than they have been getting. After all, accumulation is conceptually simple: pick a retirement date, calculate a necessary amount of savings, and aim for the target, explained Mathew Greenwald, president of research and consulting firm Greenwald & Associates in Washington, D.C.
However, the process of turning those accumulated assets back into income is much more complex, in large part because of the uncertainty of human life. Not knowing when they will die, retirees cannot use a concrete end date for their plans without risking running out of money. Similarly, a major illness or accident can send a retiree to the nursing home, raising the risk of depleting assets and even impoverishing a surviving spouse.
"There is a basic fallacy in the way people plan based on the average,'" Greenwald said. Few people die the year of their actuarial "life expectancy," with half falling on either side of the mark.
"If you plan for life expectancy, there's a 50% chance you're going to be wrong," explained Mark Holden, vice president of channel development at Fidelity Investments Life Insurance Co. in Boston. The industry is to blame for the fact that few investors understand this and other risks of retirement, commenting, "The legal industry has done a far better job of educating people about the risks of dying without an estate plan than we have of educating people about the risks of living without a retirement plan," Holden said. "Shame on us."
For most retirees, handling these uncertainties necessitates using some form of insurance, whether for life, long-term care or longevity; at the same time, concerns about inflation and the need to make retirement savings last for decades necessitates some form of equity investing.
Blending this complex set of needs means that money managers have to insinuate themselves in the insurance business and vice versa. It also means that brokers and distributors that have relied heavily on a narrow band of products need to figure out how to meet the full set of client needs in order to satisfy their clients.
This is all old news, but the market is still in its infancy. Many manufacturers and distributors alike say that they are in the business of retirement income planning, but "no one has cracked the code," said Eric Sondergeld, vice president and director of retirement research at LIMRA International in Windsor, Conn. Sondergeld headed up a study of different companies' strategies in the retirement market and discovered that, even though a huge population of Americans stands at the brink of retirement, financial services companies still have not coalesced a strategy to serve them.
"Who knows what strategy is good or bad yet?" Sondergeld said. Internal differences make it nearly impossible for companies to replicate each others' strategies, so ultimately different types of models will emerge.
Most companies have retained the division of products into silos, where there is often little communication between product groups and sometimes even competition for client dollars. Some manufacturers have shifted away from this model with an eye to serving the retirement needs of Baby Boomers.
"As we look at our business, we're very focused on the 78 million Americans who are marching towards retirement," said Wes Thompson, CEO of Lincoln Financial Distributors in Philadelphia, Pa. "We think many firms are heading down this path."
Five years ago, the company restructured its wholesaling staff so that a single wholesaler would reach an adviser with the entire slate of Lincoln's products, from mutual funds to insurance.
This multi-product approach is key for reaching Boomers, Thompson said, but has not yet been widely adopted. "It's our belief that there is a real need for multiple-product solutions, since Boomers aren't looking for one product to solve that need," Thompson said. "Unfortunately, many companies and wholesalers are trying to push a single-product solution down the throats of Boomers."
One wholesaler knocks on the adviser's door, eliminating confusion and internal competition, Thompson explained. For more complex questions, Lincoln's wholesalers are able to call in product specialists who have expertise in specific areas, such as annuities or life insurance.
Thompson said that Lincoln's structure is still unique in the industry, although more companies will make the change. Each wholesaler is a product specialist but is also trained in retirement planning, opening the door to more conversations about that and creating the opportunity to help the adviser learn about the use of other product lines.
Lincoln is taking a proactive approach, creating marketing materials about retirement income planning for advisers and sponsoring a series of "income summits" later this summer, Thompson said. This educational program will be offered in a few cities to reps from key distributors that Lincoln has strategic relationships with.
Sondergeld identified these key distributor relationships as another opportunity for product manufacturers looking for an in into the retirement income market. "Some companies recognize that bigger distributors are developing their own strategy, asking themselves, How can we develop products that fit within that framework?'"
The key to really penetrating this market, is to shy away from product, instead looking at market, even though most companies have failed to so do, Sondergeld said.
"Obviously a comprehensive approach is going to be best," said John McCarthy, senior consultant with Advanced Sales Corp. in Oakbrook Terrace, Ill. "But for a lot of companies that are not Fidelity, there is a different reality."
Companies that are looking to get into the retirement income market should make do with what they have rather than spinning their wheels gearing up a large effort. "Getting started now is more important than having a fully comprehensive plan," McCarthy said.
Furthermore, companies don't have to reinvent the wheel in order to be a player in the market, he said. Every product or strategy has its advantages and disadvantages, so it potentially has a place as part of the solution.
The simple answer is that there is no simple answer. The inherent complexity of retirement planning speaks to new products, new planning tools and an institutional shift away from the division of products into silos. The companies that are looking to really capture this market have to incorporate the same philosophy in their internal operations and develop a retirement income strategy.
However, there will still be room for niche players and firms that don't have the firepower to attack the market comprehensively.
The bottom line is that even this group has to recognize that the role of advisers is increasing and changing. After all, Sondergeld summed up, "Planning the rest of your life is not a transaction."