The financial advice industry faced some significant headwinds in 2016 from the rise of competition from robo-advisers to the historic expansion of regulation under the Department of Labor's fiduciary rule. Although the economic and public policy outlook is murky, thanks to the largely unexpected victory of president-elect Donald Trump, 2017 could be the year that holistic retirement planning becomes the norm.
Demographics will drive demand for financial advice as baby boomers enter retirement at the rate of 10,000 people a day. The oldest boomers, born in 1946, have already reached the age 70 ½ milestone that requires them to start taking required minimum distributions from their retirement accounts. Some 24 million boomers are now 65 and older and 33 million more will join them over the next seven years.
“The time has come to help them focus on the income that will support them throughout retirement,” said Cathy Weatherford, president and chief executive of the Insured Retirement Institute (IRI). “Financial professionals who embrace a holistic approach will be well-positioned in today's market as they demonstrate value to their clients.”
Separately, a new survey by New York Life found that Americans' optimism about their financial future is rising as they head into 2017. The survey of more than 1,800 adults age 30 and older revealed that 41% of Americans feel they will be more financially secure and in better shape for retirement compared to just 24% who responded to the same questions in a similar survey in 2011.
“The negative effects of the Great Recession appear to be waning when it comes to Americans' expectations and their proactive plans for financial well-being in 2017,” Mark Madgett, senior vice president at New York Life, said. The survey also found that more Americans plan to seek professional help with managing their finances in 2017. Nearly a quarter of respondents said they will seek help compared to just 14% five years earlier.
Many investors will be looking for help converting their lifetime of savings into dependable retirement income. A separate study by Prudential Investments of more than 1,500 American adults conducted last summer found that while 80% said preparing for retirement is their top financial priority, only 50% of pre-retirees say they have a strong retirement plan in place.
“Understanding the hurdles keeping people from a secure financial future is critical to helping them meet their goals,” Stuart Parker, president of Prudential Investments, said. “This research reinforces the need for people to seek advice and the need for the investment community to give advisers the best tools and solutions available.”
A new IRI study of recent retirees found that more than four in 10 participants receive at least 50% of their income from a traditional pension. In contrast, only one in four baby boomers expect significant income from a defined benefit plan. That means more than 75% of this population will need another form of guaranteed income to fill the void and alleviate their concerns about running out of money in retirement.
In its annual State of Insured Retirement Industry report, IRI found strong demand for lifetime income based on demographics, increasing longevity and the demise of traditional pensions. But historically low interest rates and uncertainty over the impact of the DOL fiduciary rule has created challenges for the industry in creating new annuity products and expanding use of annuities by financial advisers.
The IRI report discussed the impact of rising interest rates as the retirement income industry heads into 2017. “Market anticipation of deficit spending to repair and improve U.S. infrastructure, combined with an expectation of tax cuts, could fuel inflation and lead to rate tightening,” the report said.
Increasing interest rates would benefit the retirement income industry in several ways. Payout amounts would increase for both immediate and deferred income annuities, making them more attractive to retirees and near-retirees weighing options for security income in retirement. Fixed indexed annuity caps and participation rates would also rise. Higher interest rates would also lower hedging costs for variable annuity lifetime income benefits, allowing insurers to offer more generous terms, such as higher withdrawal rates and increased roll-up rates that result in larger guaranteed balances.
On the public policy front, the IRI report focused on the DOL fiduciary rule, finalized in 2016, that significantly expanded the universe of activities that would require advisers to act in the best interest of their clients, not merely recommending suitable investment advice. The second half of 2016 was marked by unprecedented changes in the financial services industry's compensation structures, business practices and product development to adopt to the new regime. But it is not clear whether the new rules, designed to effect on April 10, 2017, will be delayed, modified or repealed by the incoming Trump administration or the Republican-controlled Congress.
“As financial professionals continue to embrace holistic retirement planning approaches, a greater emphasis will be placed on developing plans to meet clients' needs as opposed to merely asset accumulation,” the IRI report said. “A greater focus on needs will lead to more conversations on income planning and allow advisers to leverage income-generating strategies within retirement plans.” At the end of 2015, assets in tax-qualified retirement plans totaled nearly $24 trillion.
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Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.