NEW YORK - Selling retirement income guarantees after a recession is like selling flood insurance after a flood. Timing is everything, and currently the timing could not be better.
Insurance companies and asset managers have been longtime competitors for investor assets, but neither group offers what investors really need in retirement: An easy transition from building up wealth to drawing it down that provides retirees with a steady, pension-like income for the rest of their lives without requiring them to take big risks or sacrifice control.
By working together, these two sectors are finding that they can mix and match unbundled products to create personalized retirement offerings that attach guaranteed income components onto mutual funds, such as automated income payments and income annuities.
The word "annuity" was a dirty word in the money management world as recently as two years ago when equities were delivering double-digit annual returns. Locking money away in an annuity was widely said to be foolish, but then again, nobody thinks about insurance until they need it. By then, it's usually too late for the current disaster, but not too late for future ones.
Last year's disastrous markets slammed investors of all asset classes, but mass affluent investors in or near retirement were particularly hard hit, especially those who were convinced to maintain large equity allocations.
"The need for income solutions has never been greater," said Ira Millman, managing director of advisory and brokerage services at UBS Wealth Management, at the Money Management Institute's 2009 Fall Conference here last month. "The insurance industry could win big here. You have to be opportunistic."
Many advisers are locked into the accumulation mindset, but as the 77 million Baby Boomers begin to retire and start spending the $14.4 trillion they've saved, a large number of these Boomers will roll over their assets from managers they may have had for 30 years to someone completely different.
To hold onto these assets and continue to collect management fees, financial advisers, insurance companies, mutual funds and other asset managers will need to change the way they look at retirement.
As pre-retirees aged 58 to 65 start thinking about retirement, their interests will shift from accumulation to decumulation, or the gradual payout of asset over the remainder of their lives, said Matthew Grove, vice president of fee-based advisory at New York Life Investment Management. "We just had a major market correction, and we probably will have another one before Boomers pass away," he said. "Can they afford to take as much risk in the future?"
There is a monumental effort underway to move the industry from the accumulation phase into retirement, he said. Once an investor stops accumulating assets, they move from managing their assets to managing their liabilities.
What Retirees Want
"Retirees are more concerned than ever about their ability to generate income that will last throughout their retirement," said Rebecca Amoroso, head of Deloitte's U.S. insurance practice. This gives insurers an opportunity to develop products that can mitigate uncertainty about retirement income, she said.
As consumers become more sophisticated, advisers will need to be able to deliver advice in a more sophisticated way, said Bruce Harrington, senior vice president of retirement solutions at LPL Financial Services. He said companies should help advisers become positioned to be decumulation experts, not just accumulation experts, so clients won't move all their money to cash when they retire.
"We know the future of business is to work with fee-based advisers," said Joseph Sprague, vice president of relationship strategies at Nationwide Financial. "We will have to change our orientation as an insurance company."
He said the insurance industry also needs to change the public's perception of annuities.
"The advisers we're targeting consider themselves to be experts on portfolio construction, financial planning and money management," he said. "They don't like or use annuities and consider them to be expensive and complicated products."
"Mutual fund companies will likely need to reposition and broaden their brands for the retirement income market," said Cary Stier, Deloitte's U.S. head of asset management services. "This sector has the greatest exposure to asset erosion as the Baby Boom generation retires, but they are also in a potentially good position to capture rollover assets."
The retirement income market is notably different from the asset accumulation market that financial services companies are accustomed to serving, and firms wishing to capitalize on this huge and growing market will need to understand the needs of this new client base, according to a Deloitte study titled "Mining the Retirement Income Market."
"Given the potentially significant investments and degree of change that may be required, not all financial services companies can or should choose to compete in the retirement income market," the Deloitte study said. "Those considering whether to enter this market should look beyond its aggregate size to ensure they understand what actions they will need to take to be successful."
As product innovation intensifies, Deloitte expects to see more development of unbundled products that can be sold a la carte or assembled into packages to meet specific customer risk preferences, the study said. "Whether bundled or unbundled, the next generation of products will likely be packaged and marketed as simpler and easier to understand, and be available for sale via less expensive distribution channels."
"In order to have stand-alone living benefits, they will need to be easy to use and incorporate into platforms so that advisers will use them on a regular basis," Sprague said. "We know that cost is critically important. These things can't be expensive. One percent is the magic number."
Right now there is a tremendous amount of enthusiasm for these products, but it takes time to change behaviors, Sprague said. The pioneer always gets the most scrutiny, and firms who try to launch these products will have to get approval from individual states in order to sell them.
"Many consumers don't think 30 years out," Grove said. To keep up the enthusiasm for insurance once the economy finally recovers, he said firms should promote the benefits customers can see today from these products, such as the way a guaranteed income means more money to spend now.
"Consumer demographics will drive this," Sprague said. "We can only hope that as we go forward, more people will use these tools and they will get accepted and processed more quickly."
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