Retirement Watch

The quest for retirement income

It's not a product, but a process — one that still stumps most advisers

Jan 3, 2010 @ 12:01 am

By Dennis Gallant and Howard Schneider

Although the market rebound since March has helped ease retirement-funding concerns among investors and advisers alike, a sense of uncertainty lingers. Advisers are still grappling with ways to provide some measure of predictable retirement income in an environment that remains anxiety-ridden.

In our recent report, “Advisor Best Practices in Retirement Income,” we examined the unsettling retirement income issue and noticed five major themes:

• Despite the rebound in market valuations, advisers still recognize the difficulty of delivering effective retirement income solutions. In fact, advisers indicate that delivering retirement income support is more of a challenge now than it was a year ago, with more than half of advisers surveyed saying they believe this to be true. The challenge: how to deliver stable, reliable income while balancing the longer-term desire for growth and protection from inflation.

• Advisers have serious questions about fundamental aspects of managing retirement income portfolios. While the market's recent performance has given advisers renewed confidence in their ability to serve retired clients effectively, significant doubts linger.

Many advisers continue to question the validity of relying on Modern Portfolio Theory or using historical assumptions when building retirement portfolios.

• Long-term challenges, such as the potential for rising taxes and uncertainty over health care costs, are significant concerns for advisers. Not surprisingly, they question whether they can manage such risks, which can undermine the foundation of any retirement plan. These issues tend to be highly visible and politicized, with little clarity on what are reasonable assumptions to use when forecasting retirement-related needs. In contrast, advisers are far less concerned about coping with a market downturn or having to advise clients about delaying retirement or returning to work once retired. For most advisers, these risks — while very real — also appear more manageable, especially in light of actions taken in the recent past.

• It's not about products. Almost nine in 10 advisers surveyed believe that retirement income requires a process of bringing together solutions, rather than an overreliance on the products themselves.

One of the lessons reinforced by the market downturn and revival is the importance of having a planning-based approach to delivering retirement income support.

Roughly six in 10 advisers who responded to the survey said they have increased their emphasis on planning or delivering advice to retired clients. Advisers build retirement income portfolios using a wide variety of solutions, depending on client circumstances. Having a sound process enables them to scale delivery and integrate products in the most effective way for their clients.

• Advisers want more insight into best practices and peer benchmarks related to retirement income support. They are looking for more information about what works and what doesn't. They want help in finding and evaluating retirement income solutions and assistance in refining their current processes.

Clearly, the market environment has underscored the basic issues that affect the delivery of retirement income support. The past 18 months have highlighted the uncertainty inherent in managing retirement income portfolios and accelerated changes in how some advisers serve retirees. This uncertainty is further compounded by the absence of generally accepted benchmarks or standards in how to deliver effective support.

We've found significant variation in how advisers build and manage retirement income portfolios and uncertainty about how best to provide income to clients. Yet it is clear that some key lessons have emerged for advisers who are re-examining how they serve retirement clients.

First, develop a flexible, highly tailored approach to managing portfolios. Recognize that retirement income is just one aspect of support that retirees will need. There is growing demand for support of aspects of retirement such as elder care, health care and even career and skills counseling.

Also, avoid a focus on products. They're not the answer to the retirement income puzzle. Instead, develop a value-added approach or process that can differentiate your practice from those of other practitioners.

Dennis Gallant, president of GDC Research, and Howard Schneider, president of Practical Perspectives, are independent consultants and researchers whose specialty is the delivery of advisory services.

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