Don’t Look Now - But Your Valuation is Slipping

An old saw claims that good wine and wisdom get better with age. But of late, that maxim does not seem to apply to the aging of typical advisory practice. At NextChapter, we observe organizations of all sizes delivering great financial results - earnings - but losing assets to the inevitable impact of an aging clientele. Left unchecked, firm valuations will continue to slide. That’s not the next chapter most ownership envisions. What to do?

We see three common scenarios - each a function of how that ownership views their situation. Let me first describe the three and then suggest remediation strategies for each.

Scenario 1 - What’s the Problem?

This is “great earnings” scenario - powered by a historic bull market, maybe some acquisitions. Earnings are great if you are an employee or a stockholder with a short term time horizon. If you plan to retire soon or sell your stock, there is no problem here. Advisor attrition is at an all time high and there is strong anecdotal evidence of record senior industry leadership departures - also well timed with a cresting wave of success. So with the benefits of good timing, we say “enjoy!”

For the other two scenarios - it’s back to reality.

Scenario 2 - What to Do?

Firms in this bucket tend are operating as usual for the most part, but have lost long-time clients here and there due to life-related inflection points like a death or significant illness.

As you know from popular industry data, advisors without a solid relationship with spouses, partners and adult children seldom hang on to those relationships. 70% departure rates are noted for the unengaged spouse, 90% for the unengaged Generation 2 children. An experienced trust and estate colleague of ours claims that when she gets involved with a competitive situation and the survivors are questioning the value of continuing with the incumbent advisor, she finds enough overlooked details to win 100% of clients away from their (typically) dad’s advisor. So there is a cost of inaction.

This scenario is mostly defined by a lack of certainty - what should we do - and not a lack of interest or willingness. The practice is challenged by new circumstances associated with aging families.

Scenario Three - Bring it On

These are the advisors and practices that are leaning in to the challenges of aging clients and seeing the opportunities with surviving Generation 1 spouses/partners and with Generation 2. This is the advisor cohort that has been including - requesting - engagement with family members before most of the “Moments” occur. This proactive effort is paying dividends as conditions develop and the family already knows and trusts the advisor and team.

This type of practice also manages more moving parts than a straight-on investment shop. We see three important attribures that define a “longevity savvy” business compared to the other two scenarios above:

Dedicated professional staff applied to the unique demands of longevity planning - including the ability to react to the Moments That Matter without significant disruption to the business.

A mindset of proactivity to engage. This practice is not just ready for action - it facilitates it. In the classic family office model or the ethos of a private bank, connecting with G1 survivors and Generation 2 is THE business objective, not an ancillary activity.

The practice measures success not by absolute financial returns, but by the percentage achievement of “opportunity”. This metric is different from most advisory practices and becomes more powerful as the size of the organization increases. Another descriptor is serving well “the other 80%” of the clients typically not the focus clients of a firm. The narrowing of engagement is a natural development over time as clients that are not ideal or not fully connected may slide off in part, attracted by other products, different ideas or lower prices. The “full opportunity” objective is a dedicated plan to earn back those “held away” assets by learning why they are not with the practice and what it would take to get them back. This is a true mindset of creating and maintaining organic growth.

So Growth Doctor -  What Now?

Back to the first scenario. The perspective that there is “no problem” may be not be so accurate depending on the exit strategy. Like with the sale of your family home, your sales price has a lot to do with your view of the result. A practice that has been depleted by withdrawals from aging clients - and not replaced by engaging G2 children or new Gen X or Millennials - is truly a wasting asset. We see greater scrutiny of the “age-weighted” revenues when buyers approach practices. Organic growth is the metric — retention plus the impact of net annual flows - and this measure has become top of mind for buyers including more savvy private equity firms. Buyer education is improving, informed by some overly optimistic early acquistions, and that dilapidated house just won’t fetch the premium paid for a well maintained structure.

Scenario One invites a couple options - mostly a function of time horizon. If the owner wants to go soon, one choice is to align with another firm and help transition relationships. On a timeline with transparency for everyone. This is the best way to increase value by getting help to grow the existing relationships.

The second option takes more time but essentially recruits a junior partner to earn out the buy. One interesting take on this option we saw recently was a two year run after the hiring of the primary owner’s daughter, who refreshed most of the firm’s relationships, picked up the G2 kids and nearly doubled the practice revenue. She leveraged the G1 connections but really focused more on the kids, who she said were “learning a lot” by watching the issues faced by their aging parents. With those lessons running in real time, the new advisor got the kids to the table investing in retirement income and long-term care, with immediate bump to the firm’s margins.

Scenario Two is a bit easier - if the WILL is genuine. So many advisors and firms are running so fast that it is difficult to find the time to add longevity services. The additional needs of aging clients and their families can creep up on us - and all of a sudden everyone seems to need everything. That’s the real challenge of those “Moments That Matter” - they don’t come with advance warning.

Scenario Two firms first need a strategic “time out”. Resist the temptation to treat longevity planning as just a bolt-on to your existing capabilities. This is a different business requiring different service and - likely - dedicated personnel. The most effective model we have seen is when the practice acquires a specialist to not just meet the current expectations of current clients, but also oversees the practice “expansion” into longevity planning and the aligned capabilities, like how to refer caregiving needs, execute estate planning and mitigate risks of fraud.

Linda M, a senior advisor from a wirehouse firm, joined the existing four professional practice at a competitor in Northeast Florida. Linda says - with a smile - “I do the soft stuff”. She now oversees most of the firm’s financial planning capabilities in addition to coordinating support capabilities including fraud protection and caregiving referrals and long-term care. Linda’s four partners each focus on one other legacy capabilities - retirement plans, investment portfolios, bonds and tax management. They say, “For our clients and their families, Linda is the glue”.

The Thirty Year Flood (of New Business) - Choose a Boat

The condition of an aging demographic is so well known, the very mention of “baby boomers” creates the eye roll wherever I go — but this is more. The current state of the advisory business is being shaped by an demographic but the awareness of that force is uneven across firms either not  immediately impacted by the loss of clients or complacent about their current terrific financial results. As a result, the response to the demographic changes is wide ranging.

Like most really significant trends, the impact of longevity is slowly building but will be a game changer for alert advisory practices leaning into the trend - and for companies providing capabilities and products that support higher quality longevity. Adaptable firms have an opportunity to capture market share at a rate we have not seen since managed accounts began to roll over stockbrokers. That part of the industry captured $12 trillion from a dead start. A similar path could be enjoyed by companies offering retirement solutions including protected income. Annuity sales were a record $100+ billion in the first quarter of 2024. Given the slim penetration rate of annuities within the advice industry, I can see upside that is multiples of the current run rate in order to achieve a pretty basic share of the retirement pie. The demography of the annuity buyer is getting younger - reflecting a lot of interest from Generation 2, which is learning from watching their parents. And we know that they are just getting started - this tide will lift all participating boats.

Longevity planning and solutions - stimulated by the Moments That Matter - are the biggest potential disruptors and drivers of business valuation since the move from advisors selling products to positioning managed solutions.

So what is your plan?

by Steve Gresham

The Business of Financial Wellness 2.0

Written by: Steve Gresham and Suzanne Schmitt

Supreme Court Justice Potter Stewart famously remarked about pornography, “I know it when I see it.” The point was that it’s hard to otherwise put something that seems obvious into words.

We have a similar problem with the phrase “financial wellness.” Conventionally framed as managing daily finances, protecting against risks to your money and achieving goals, it’s best thought of as a journey where the destination is a state of financial well-being. Yet even the idea of being “well” can be highly subjective.

You can assess an individual’s financial health at a point in time, but their personal and familial circumstances are bound to change. Healthcare issues, for instance, can disrupt even the most thoughtful financial plans.

But if we are merely focused on investments and products we sell—as opposed to being well-being specialists—we haven’t gotten involved in those personal things. Viewed purely through a financial lens, many clients in their late fifties and sixties may be retirement ready. That instinctually leads us to jump to the conclusion they are financially healthy. We don’t lean into the messiness that is life and family financial planning.

And that could cost us.

It’s important that we prioritize well-being if we want to sustain the value of holistic, fee-for-service, fiduciary-level advice. If our clients don’t achieve peace of mind with their current advisor, they can be lured through workplace and retirement wellness offers to other firms where they think they will achieve it. Nothing motivates people more than fear—and many of our clients are genuinely afraid they will run out of money, need to sell their homes or move into assisted living.

In our personal experience (through our failures and successes), we’ve become convinced that centering our ideas on well-being can help advisors achieve their business goals (in the form of net new assets, growth in consolidated assets and increased share of clients’ wallets). Consider these five things:

Words matter. If you want the language you use to change the perception of your firm, remember that you should use words that offer peace of mind first, not technical concepts about asset allocation and investment policy.

You want better outcomes, not best efforts. Most retirement solutions in place today depend on market results and are subject to market risks. These risks are well known to the designers, who rely on their knowledge of capital markets research and dampen the risks by using long time horizons to smooth variations. While it’s a rational, objective approach that generally works for the population at large, individuals might have problems with the risks of the design and its terminal points: Today’s retiring clients and plan participants have seen down markets—big ones—in 1987, from 2000 to 2001 and from 2007 to 2009, as well as some sharp corrections in between.

The late father of Steve Gresham, one of the co-authors of this article, knew nothing about markets or investing, but he knew when the stakes were too high for his peace of mind. He worked for universities his entire career and earned the negotiated benefits of retirement annuities. He surprised Steve by sharing that he had converted his 50/50 stock-bond plans to 100% annuities with Steve’s mother as second life. He never looked again at the market. He cashed the checks, and now so does Steve’s mother at the age of 88. Their definition of “financial wellness” was not having to worry about the markets, their income level, their ability to finance healthcare or their ability to age in their home. Done.

The clients of financial advisors often are looking for a certainty of outcome. If the client is analytical and satisfied by data, they might enjoy a risk matrix offering a percentage likelihood of success. But it’s unlikely more than a fraction of our clients are like that—especially not retiring couples and their families. In most households, there’s someone who values protection and guarantees over potential returns or capital market theory.

The household is the client. Most advisors dealing with a household talk to the typically male and financially confident household head. Their firms may realize they should be dealing with multiple generations of a client’s family—including the spouses, the adult children and aging parents—but they haven’t given their advisors the direction to do it. This demographic sandwich, the generation above and below your clients, will drive more than 80% of advice industry profits through at least 2030. Our success depends on both keeping our existing clients and consolidating the assets we don’t currently oversee but our competitors do. Client relationship management software will have to accommodate entire families for this reason, and we’ll need to coach and train associates to talk about and to clients about these other family members.

Your service models will have to be for everyone. And remember, each of these different family members will have a different idea about what “peace of mind” means and whether you can offer it to them.

Frank McAleer, a senior vice president of wealth planning at Raymond James, asks clients, “What is the list of stuff you most worry about or that could go wrong as you live longer?” And “What about family members for whom you could become responsible?” The answers will be different for a 26-year-old 401(k) plan participant and for a 62-year-old pre-retiree. Different still for their families.

For this you might have to create separate service models for different family members—with different levels of communications, pricing and product and service options. One family member might want the reliability of a paper account statement; another might need the immediate transparency of a mobile app. When you have separate models, you can more easily and consistently focus on improvements for unique cohorts.

Wealthy families in particular expect their advisory firms, plan sponsors and plan administrators to offer a variety of models, including in-plan advice and fiduciary wealth management (with trust services). And if the past is any indication, those expectations will quickly spread to people in the mass affluent category and beyond.

Know how to implement. So how do you integrate “well-being” principles into your services? It’s a matter of both will and skill.

You may or may not possess the empathy you need when a client’s talk turns to the needs of an aging parent or the need to pay off a child’s college loan. If you don’t, that’s a management problem for your firm, which has to make sure empathetic advisors are in place. Your will to do this might suffer still, ironically because of your success at the markets—stock rallies likely make your work look easy and lessen your enthusiasm for harder tasks, such as mustering the energy to reach three generations of clients in a household. But if you fail at that, you risk less trust and less wallet share.

Technology’s Role

The bad news is that “wellness” is not a widget companies can attach to their existing offering. That approach has been attempted with the best of intentions by retirement income product providers. But the complexity of the products and their sometimes inconsistent availability (and pricing) are barriers to more consistent use in planning—and adoption by more advisors.

To achieve its true potential, “wellness” must be integral to the language and the systems and the solutions of a firm. I will never forget the call from a seasoned advisor who had completed his outreach to a wealthy family, with the help of the head of household. “I now have nine clients instead of one!” He was only partially kidding. It’s a lot of work to track the needs of families, and you don’t want to be the advisor who missed a Medicare election, a life event or the 21st birthday of a beneficiary.

The solution is a combination of systems for client data, simple technology tools for the clients that can be used along with the advisor’s old school training and coaching. The advisors and clients both will have to adopt the technologies to ensure the reach and consistency of engagement. And creating systems like this is the No. 1 job of today’s financial firm CEOs if they want to create peace of mind among both clients and advisory firm associates.

The Workplace

One way for a wellness specialist to connect with clients is by getting to know their workplace/benefits providers. Work is where your clients make much of their money and get basic insurance. As it happens, workers place profound trust in their employers and the service providers they offer. The public relations firm Edelman, in its 2023 “Trust Barometer,” said that workers trust their employers more than government, media, advertising or other corporate sources.

How much do you know about your clients’ benefits? Or their spouse’s or partner’s? Or the advisors who service their workplace plans?

It’s also a natural place to get more involved and introduce advice and guidance light. If we leaned in, we might find out about things like employer student loan repayments, which, as we noted earlier, could help a next-generation client who is looking at student debt as an obstacle to wealth creation early in their financial lives.

At best, you’ll find educational resources for your client. At worst, you’ll uncover risks to your relationship in the form of competing products, services and advice.

The next thing you’ll want to be on top of is your clients’ key life events—those inflection points when money is in motion. Studies suggest roughly two-thirds of consumers seek advice after a major life event (a marriage, a child going to college or a death or inheritance). These points present an opportunity for you to engage in advice and naturally place products, services and solutions. Workplace plans are getting smarter about using data to get in front of consumers in transition. How strong are your relationships and capabilities to help consumers to and through life changes? Is this a practice vulnerability for you?

Advisors focusing on wellness can also become more credible by choosing the right partners: trustworthy subject matter experts who offer you a deeper bench of knowledge. Different organizations can offer you support for issues concerning caregiving (something tackled by the National Alliance for Caregiving, for instance), general family financial health (a field covered by the Financial Health Network) and end-of-life planning (for example, the organization called Going with Grace).

How much do you know about your clients’ health, family health history and potential caregiving obligations? If the answer is “not much,” your clients may be at risk. The diagnosis of chronic health conditions is on the rise. Roughly 20% of people in the U.S. are currently acting as an unpaid caregiver—frequently to the detriment of their own health, financial security and professional growth.

Knowing more about these issues can help you retain clients. You’re also positioned for growth with the next generations.

What Advisors Get Wrong About Wellness

Remember the old saw: When you have a hammer, everything looks like a nail. The same is true with financial products. When you have one, you’re looking for a need and you do things backward.

Consumers aren’t looking for product. They’re looking for someone who deeply understands their needs; is empathetic; and offers objective, product-agnostic resources and advice.

Advisors also get things wrong if they’re not looking at the risks of a client’s entire family. After all, a client is only as financially healthy as the people who depend on them. Even if your clients seem to have their act together, how much do they know about their parents’ ability to navigate a major health setback? Or their parents’ ability to afford staying in their home as they age? How much do they know about their family’s financial plans and the impact events might have on their balance sheets?

And how well do you understand these risks your clients have taken on as you look across your book?

We also err if we forget that this is a journey. Let’s say that your clients have manageable debt, three to six months of emergency savings and are basically on track for retirement. Does that mean they are financially well? Life happens. Things change. Most advice givers think that the key is to get people to retirement, but it’s actually to get them through it. Given that most of us may live a third of our life in retirement, how exactly does that work? Our offering must also get into things like how retirees maintain independence, secure income and ensure long-term care, as well as their ability to share wealth with the next generations.

The biggest mistake is to play a short game.

by Steve Gresham

The Chart of the Decade

At a recent meeting of top advisors hosted by education innovator Wright State University (where flight was born), I shared this chart under the guise of “opportunity”.

What’s the subject?, I asked. Tesla stock price? Bitcoin projection? Spending on FinTechs? Nearly a perfect S-curve, which favors the early adopters. And the best news, we can catch this one just before the S takes flight – note the arrow.

The chart is a propensity chart, depicting the likelihood of experiencing some level of incapacity due to one of the three most common health events to cause incapacity – Alzheimer’s, other forms of dementia, and mild cognitive impairment (early onset dementia).

The savvy advisors know from experience that each of these ailments presents a life change – to the client/patient and to the family. The impact is both immediate and ongoing. Nothing is ever the same. Priorities change. In the world of financial and retirement advice, advisors are needed more than ever and for more complex services.

Our response is critical. We have to react with empathy, engage professionally and with confidence. We become the financial emergency room, transitioning to long-term care. And not just for our primary, affected client – we have to be there for perhaps three generations of family members who are now also affected. Everyone needs to know we have this, we can help.

We don’t have much time before these conditions accelerate in frequency. The current overall propensity rate is 1 in 8 for people age 68 but more than doubles by 78 – and 6X at 88. Over the next ten years, nearly 1 in 3 people we now serve are likely to become incapacitated themselves, and a great many more will be impacted by someone in their life who becomes incapacitated.

For advisors and their firms serving the Baby Boomer age wave of 76 million people, this transition has been looming…but preparation is still light. Every firm and every advisor will need policies, procedures and supportive tools to:

• Identify incapacity for the protection of the client, her family and the firm
• Protect clients and their families from the threats of incapacity, including identity theft, fraud and elder abuse
• Engage families in support of incapacitated clients – as well as clients without family support
• Adjust to the needs of a family of three generations or more and help optimize finances for risk, tax, income and long-term care

Don’t Ignore This Moment

If you are winding down your advisory career, you might be doing the math and saying that in ten years you will be on a beach living the vida mas fina. That’s probably pretty well known by your clients and their families. As Accredited Investor co-founder, Ross Levin said so well at our Next Chapter Rockin’ Retirement event on May 24, top firms are winning clients and keeping clients because they have a “contract” with clients and their families that the firm will be there for them. Another speaker, veteran Tom Bradley of Schwab noted that aging clients – and aging advisors – are now important measures for the valuation of an advisory practice (get the whole program here ADD LINK to NEXT CHAPTER MEMBERSHIP).

One very interesting aspect of this chart is that it is also a good picture of the demand for pretty much everything associated with the historic demographic cohort. If they will need it, you name it and the growth curve will be similar. Demand for in-home caregivers, Medicare counselling, pickleball courts, assisted living facilities…they’re all here at the same time. Consider…..

The Price of Ignorance – Five Risks Ahead

I’ve also spent a lot of time worrying about this issue on behalf of big company clients and I see five significant risks of keeping our heads in the sand:

1. We lose current clients and their assets
2. We lose the potential consolidation of assets held by our clients elsewhere – that’s a pretty similar number to the total in 1 above
3. We lose the client’s family – if we don’t take care of the primary client, the family won’t stick around. Surviving spouses and adult children have no affinity for our failure to act.
4. We risk increasing scrutiny as fiduciaries or service providers that do not sufficiently “know your client” – an area of growing interest to state consumer protection regulators. Get ready also for a return of active arbitration in this area as we return to in-person activity after a pandemic slowdown.
5. Finally, a firm that does not do well by its aging clients is exposed to significant reputational risk. Poor experiences might be contained in the complaint process, but some of the more colorful cases will doubtless make headlines – electronic or otherwise. I expect a lot of interest in these stories.

Other Than That Mrs. Lincoln, How Was the Play?

Every corner of the financial advice and investment management industry has benefited handsomely, unexpectedly from the historic demographic wave and the power of that wave to lift all economic boats. Now it’s time to repay some of that value by meeting the needs of our loyal clients and their families – all of whom will be encountering their longevity for the first time. Our ability to serve is a function of both will and skill. I’m completely confident we have the skill. Do we have the will?

by Steve Gresham

Improving Solution Efficiency and Client Confidence with Added Protection

Written by: Paul Cahill, Steve Gresham and Mike Harris

That Portfolio is Not Enough

Todd Z. has been busy acquiring new clients. “All I have to ask a prospective client working with a traditional investment advisor is whether they have any guarantees in their investment portfolio – and would they like to add a personal pension “bucket” with a guaranteed income stream for the rest of their lives”.

“Protection is gaining more and more traction in our uncertain world,” say Todd, a 35 year veteran, and part of a 125 advisor team brokering with one of the leading national IBD firms, reports that many of his competitors are making his life easy. “A new client found me after asking the advisor (from a national firm) about guaranteed income. And the advisor said he didn’t believe in annuities”.

Heads in the Sand Can’t See Changes

Our collective history working with advisors across all national firms, RIAs and IBDs has spanned the move from stockbrokers to managed account consultants and from life insurance agents to advanced planning financial professionals. Our common observation: clients lead us forward into the areas important to them, and advisors who listen take market share away from competition fighting the trend.

Paul and Steve worked to introduce managed accounts to skeptical advisors – “Why would I refer my clients assets to a third party?! What’s my added value?”. That perspective seems silly now – especially with $11 trillion in managed accounts. For Mike, an advanced planning leader, he found opposition to solutions-based sales of life and annuity products – even among advisors already using them but only for simple sales. “One and done”, Mike recalls, “They had the tools but not the patience”. Oy.

Peak65^® is Here – To Stay

The shift from investing for retirement to actually funding that retirement is on, and more Americans will turn 65 this year than ever before. Peak65^® is here, according to the Alliance for Lifetime Income, and Peak65^® author, Jason Fichtner says that more than 11,000 people are rolling into retirement every day. We know the data, but we also see the results every day with advisors like Todd. And we are frankly baffled that many advisors are not embracing “protection”.

Are You Listening? Data Says “No”

The 2023 Protected Retirement Income and Planning Study – also from the Alliance – reveals a communication gap between retiring clients and their advisors. 77% of financial professionals say they raise the topic of protection with their clients, yet only 33% of clients surveyed say their FP has done so. This is pure communication skill – but also can be the result of advisors talking to some clients but not others. This inconsistency of solutions delivery has bedeviled the advice industry for years. Some clients get planning, most don’t. Some clients have investments and protection solutions, most don’t. With an average book of 150 households, most advisors are time challenged to keep up with the retirement needs of clients – clients that were a lot easier to care for when they were simply mailing in checks.

Use Normal Human Language, Not Financial Jargon

When investment-focused advisors interact with clients, we see semantic differences that keep clients guessing. Three risks feared by clients work against advisors devoted to portfolio management and not leveraging the power of protection:

1. “Sequence of returns” risk, aka the potential for their nest egg to crash at any point in retirement makes many clients lose sleep. Why not offer a percentage of the portfolio “hedged” against a market decline by providing protected income?
2. “Who will manage our retirement income” risk – a common fear for clients facing their own mortality – or cognitive ability. “I don’t want to worry my children”, said Jackie, a client. Other annuitants, like Steve’s dad, loved the idea of naming Steve’s mom as a second life on the annuity. Mom has outlived Dad by eight years – so far.
3. “Longevity” risk – speaks directly to clients’ well documented fear of outliving their money. Todd highlights the concept of a “personal pension” with income guaranteed for life. “Pure peace of mind” he says.

Get Support for Your Protection Move

Mike quotes Linda, a longtime advisor colleague now with Raymond James, who joins Todd in underscoring the importance of firm infrastructure in support of protection solutions. After ignoring annuities for the first several years, a colleague showed her some basic strategies that were also soothing for clients. Her recommendations for the investment advisor transitioning to at protection:

1. Start with trust – Linda cites the level of trust her clients placed in her that made the conversation about annuities an easy transition from other products.
2. Explain the benefits – slowly - once clients understand the protection aspect that annuities provide through secured income, that perspective acts to solidify their trust.
3. Address anxiety - using annuities with clients that seem to be a little anxious – roughly half her clients - really helps them get past their concerns.
4. Set the stage ahead of time – Linda includes annuities in the retirement solution set she talks about with all clients to help smooth the path to the annuity conversation when it's time for that discussion.

Don’t Speed

Top advisor, Rick gets the parting shot. “The markets have been good to us – again! Pretty much every client knows that trees don’t grow to the sky, so taking some profits off the table and ‘banking’ them for life in a lifetime income product just makes sense”.

Paul Cahill has led distribution teams across mutual funds, ETF’s, and Separately Managed accounts for the past 25 years, including most recently as National Sales Director-Independent & RIA Division for Virtus Investment Partners. He is currently serving as a executive-in-residence at NextChapter. 

Steve Gresham is managing principal of NextChapter, an industry leadership community dedicated to improving retirement outcomes – for everyone. He is also Senior Education Advisor to the Alliance for Lifetime Income. See more at: https://nextchapterinnovation.com/

Mike Harris, CFP, CLU, ChFC, led planning and protection teams for more than 30 years, most recently with Lincoln Financial Group. He is also Senior Education Advisor to the Alliance for Lifetime Income.

For more information about Peak65^® - please see: https://www.protectedincome.org/ymm-peak65/

by Steve Gresham

The Retirement Wake-Up Call is Here

Disruptors Paving the Way for New Competitors

In 1965, a Harvard-trained lawyer working for the U.S. Department of Labor published a book warning Americans that their cars could kill them. Unsafe at Any Speed: The Designed-in Dangers of the American Automobile by Ralph Nader (1965) rocked the Detroit auto industry, and its damning revelations prompted the federal government to act with uncharacteristic energy to implement the National Traffic and Motor Vehicle Safety Act the next year. Nader’s message was that car manufacturers knew about vehicle defects and in fact designed them that way. His moral observation: You can’t trust the maker of the car you drive.

Now let’s take another industry that’s likely to face trust issues. Tens of millions of Americans believe they are going to be fine in retirement. But those of us in the financial advice industry know better. Most of these retirees will run out of money, have significant health issues, and become unable to manage the care they need.

But have we warned consumers about this? If we cannot ensure that they thrive in longevity, aren’t we responsible for telling them? And if there is a problem for consumers, then financial advisors, their firms, and investment solutions companies will be greatly affected.

This article outlines:

• The impediments to effective consumer/client engagement for advisors.
• The structural barriers facing investment and product providers and advisory firms.
• The path forward for creating better outcomes and comparative models for success.

The need to aid an historically large generation of retiring consumers and their families is the most significant financial challenge in post-World War II America—and the current outlook isn’t good.

Retirement Challenge #1: A Lot of Unprepared Consumers

Consider that when you search Google for "retirement savings crisis" you will get 69 million results. The vast majority of our clients are baby boomers, the generation first born in 1946. That group still is 70-million strong, and together with their children and aging parents represent more than one-third of the U.S. population. They own half the nation’s wealth and represent 70 percent of its consumer spending. They currently generate 80 percent of financial advice industry revenues and will hold that spot through 2030, according to Tiburon Strategic Advisors.¹

We know consumers are concerned about market volatility—and that concern becomes acute when they near retirement. According to the Alliance for Lifetime Income (2023), 43 percent of consumers believe the 2022 market setback represents a longer-term change that negatively alters their retirement outlook. They are facing a different economic and personal healthcare picture. More than half of consumers said one of the three reasons they retired was circumstances of health, job loss, mandatory age requirements, or the impacts of COVID-19.

Awareness of the risks of longevity is growing. During the boomers’ lifetimes, life expectancy at birth has increased 17 percent to 78.8 years, and life span at 65 has increased 44 percent. That longevity will demand more resources from them after they retire. Yet at the same time, the workforce supporting Social Security recipients has declined. The number of workers per beneficiary was more than 50 in 1946.² That ratio has now fallen to 2.8 workers. Meanwhile, by 2040, the number of Americans age 65 and older will have doubled since 2000, and the population age 85 and older will have doubled since 2020.

We also know that many people don’t just ‘feel’ vulnerable. The National Council on Aging (Basel et al. 2023) said 80 percent of households with an older adult are financially struggling today or they’re at risk of economic insecurity as they age. Most Americans also said they want to live independently, in their own homes, as they age. But 60 percent can’t afford more than two years of in-home care, and 45 percent of people age 60 and older don’t have enough income to cover basic living costs.

Continue reading at The Investments & Wealth Institute.

by Steve Gresham

Don’t Be Afraid of Annuities

“Why would I give my clients’ money to another advisor - what would be my value?”

That line dominated the early years of today’s advice industry workhorse, the managed account. Financial advisors have amassed more than $11 trillion of client assets in a product idea once so abhorrent that I was threatened with the loss of my job in two firms and banned from branch offices by managers convinced their revenue would collapse.

The annuity is now the Rodney Dangerfield of financial advice - based on its share of retirement assets - getting no respect. Eerily similar treatment to that given the first managed accounts. So skeptics of annuities persist, despite the new reality of products designed to protect client assets more efficiently than a portfolio.

Check out the parallels:

Managed accounts are too expensive. The first managed accounts sported annual fees of 3% per year, which seemed high to portfolio managers providing institutional clients the same service for much less. But to most stockbrokers, 3% was inadequate compared to commissions on stock trades or 8.5% front end loads on some mutual funds, 4% on a bond and something in the middle for a unit trust.

Reality: Competition brings down costs - to the benefit of the consumer - and managed accounts now average closer to 1% per year, the 8.5% loads are gone and commissions are zero at Fidelity. Likewise, “annuities” are not all priced the same and advisors remembering heavier variable products are usually surprised by the current pricing.

Selling managed accounts will cut my income. The managed account was a trap door for the industry, said advisors and their managers used to the instant gratification of product sales and commissions. Purchasing annuities on most platforms reduces the advisor’s AUM.

Reality: More forward thinking types saw the potential for building assets, leveraging the markets for growth of AUM and providing more time to work with clients and find new business. They traded the short-term hit to current income in favor of building for the long-term.

Likewise, the addition of protected income strategies is very often viewed by clients as an additional service - and advisors report success in capturing assets currently held away from the primary advisor. So protection strategies can increase overall client share of wallet.

Managed accounts are too complicated. Complaints rained in on advisory headquarters from advisors howling about the need for “multi-page!” investment policy questionnaires, client signatures (“They gave me the OK over the phone”) and additional registration as an investment advisor agent. Multiple asset classes and “too many” sub-advisor names were “confusing” to clients - “Why can’t we use just the managers beating the market?”…

Reality: A new level of professionalism was replacing the stockbroker. The managed account is not a product, industry pioneer Len Reinhart would often say, it is a service. Consulting units like his at Smith Barney had duplicated the investment approach used by corporate pension funds and endowments. Clients now had not just a personal advisor, but also a consultant selecting managers and tracking performance, and full time investment teams managing their money.

Advisors who manage only investments miss the opportunity to contribute to clients’ net income and equity by addressing their expenses and liabilities. That’s no longer an option. Clients feeling confident about their $1 million nest egg may not be considering their potential longevity and the prospect of funding a retirement that stretches three decades - or more. The reality is that very few retirement aged clients have sufficient assets to fund their longevity, including the highly variable costs of healthcare and life care. Leveraging limited assets is a fast growing theme for a new level of advisor professionalism that seeks to ensure the protection of clients, not just investment returns. The definition of a “financial advisor” is changing once again - beyond “investment advisor”.

No one is asking for a managed account. My personal favorite and the perennial foe of any entrepreneur introducing anything new. The classic responses include “People riding horses never asked for cars” or the more contemporary version when Apple combined our music and a camera into a portable telephone.

Reality: Products rise to meet consumer demand. The stockbroker never really answered the nagging question, “How am I doing?”. As more clients became responsible for their retirement - IRAs, 401(k)s - they became more concerned about returns. Independent investment managers and trust companies were only too happy to provide custodial services and performance reports. Clients were looking for a better, more reliable and more transparent solution. It was less important for clients to fully understand or appreciate the role of asset allocation and risk management and multiple asset classes. Stockbrokers working for commissions didn’t meet the standards of a “process”.

“Annuities” have matured to meet consumer demand. More than 100 products in a couple dozen categories filled the annual Barron’s guide to the best annuities. Income streams can extend to cover a lifetime, begin at specific ages to match liabilities, add features to offset inflation, incorporate death benefits and name specific heirs.

The real power of consumer demand is that consumers may not be able to name what they want but they sure can describe what it should do. Savvy marketers interpret and great innovators build the solution. The best advisors using annuities do not rely on complicated illustrations or labor over the lengthy applications, they talk to the clients about what they want to accomplish. Protection is an emotional topic - the solution is an emotional decision. Peace of mind is not an intellectual compromise for the advisor.

Satisfying clients’ emotions is not enough to overcome doubters among mostly left-brained, analytical advisors. But clients - and their families - are very much emotional beings and become more so as retirement arrives. The benefits of early retirement are eventually replaced by the reality of surviving longevity. Longevity is the looming spoiler for folks mostly now enjoying the “go-go” years of retirement. In 2024, more Americans will turn 65 than ever before - Peak65(tm) according to research by the Alliance for Lifetime Income. At a median age of 68, the 70 million boomers are still mostly robust and well funded relative to where they may find themselves in a few years. That’s the trend we’re not ready for - and the one that will test the loyalty of clients now hearing about their chances according to Monte Carlo.

Start small. Very few of the managed account converts went in 100% at the start. Most focused on discrete uses - especially retirement accounts. And the clients needed to be open to a different approach.

Annuities have similar opportunities and adoption challenges. Start by complementing investment portfolios. How about reducing exposure to MRDs? Investing for retirement after maxing out on plan contributions? Maybe a supplemental income stream beginning at 80 and running for life? Younger clients can benefit from tax deferral of gains. (A more complete list, The Top Planning Uses of Annuities, can be found at TBD). The added value is to more efficiently solve for specific risks or objectives than can be accomplished by investing. That’s also the explanation for clients used to investment products - this is a better use of your capital.

No one likes change. New ideas and processes are clunky - especially in the early years as demand builds and the inevitable friction points are smoothed by technology and common sense. According to one of the nation’s largest wealth management firms, advisors who are leading this adoption curve are earning as much as 4x the net new assets and 100% more revenue growth than non-users of protection products. That’s a return on investment even a stockbroker would recommend.

by Steve Gresham