Getting smarter investors to move beyond an “offense-only” approach

People who can be classified as members of the growing mass affluent group might be considered better informed and more sophisticated at planning their financial futures. They have achieved success through hard work, and they have invested wisely, quite often with the assistance of a financial professional. By definition, they have investable assets of $100,000 to $1 million, and they often spread their allocations across investments such as 401ks, IRAs, CDs and more.
These are the same people who would presumably understand the need for a diversified approach to financial planning, one that supplements those growth strategies with the right protection products — life insurance, disability insurance and annuities. They likely know their income stream is their most valuable asset, and they realize an injury or illness that would prevent them from earning a paycheck could dramatically impact their ability to save for the future. They might even be aware of a sobering statistic from the Social Security Administration: a little more than one in four of today’s 20-year-olds will become disabled before reaching age 67.
Yet the results of a poll recently conducted by the MetLife Premier Client Group suggest mass affluents may not be as prepared for retirement as one might expect.
In fact, the MetLife Financial Planning Perspectives Poll shows that financial professionals still have work to do when it comes to educating these “smarter” investors on how to implement a truly holistic approach to long-term planning. Conducted last November, the poll surveyed adults identified as “mass affluents” and provided a glimpse into their mindset:
• A majority of those surveyed do not understand the importance of a balanced approach. Nearly three in four (72%) say they have a financial plan in place for their futures, and an equal number believe they are on the right track. However, their confidence may be misguided. More than half of those surveyed (55%) said that protecting their assets with products such as insurance and growing their assets with products such as mutual funds were not equally important. This clearly indicates that even the more astute individual investors are not entirely clear on the importance of putting the right protections in place so that their assets are more secure over the long term.
• There is still plenty of confusion and uncertainty surrounding insurance. Roughly two-thirds of those surveyed don’t know exactly how much coverage they should have in place when it comes to life insurance, annuities and disability insurance.
• Many people are taking what might be called the “offense-only” approach to financial planning. Nearly three quarters of those surveyed are participating in retirement and savings/401(k) plans. At the same time, a much smaller number of people have invested in protection products such as annuities (only 37% of those surveyed), long-term care insurance (34%) and disability insurance (32%). Again, individual investors seem sold on the notion that they need to grow their portfolio, but they still need to be educated on the importance of safeguarding their assets from unnecessary risk.
Sound financial planning and sports of every kind share a common organizing principle: An offense-only approach will not lead to a win. Clients who are focused solely on growing their assets are ignoring the potential risks to their current earnings capacity and their future income stream, and this can put their entire financial strategy in jeopardy.
Couple this with the fact that Americans are living longer and the risks are even greater. The Centers for Disease Control recently reported that a baby born in the United States in 2012 has a life expectancy of 78.8 years, an increase of two years in life expectancy since the beginning of the century and more than nine years since 1960.
The prospect of living longer lives has significant implications when it comes to retirement and long-term financial planning, and it serves as a wake-up call for financial and insurance professionals as they help clients formulate strategies. The MetLife Financial Planning Perspectives Poll shows that 63% of those surveyed expect they will be able to retire during their 60s. With a longer life expectancy, those same people may need to plan for a financial future that keeps them secure into their 80s or beyond.
Financial professionals that demonstrate the value of a more diversified approach to long-term financial planning can go a long way toward securing the trust of their clients.
It means adding a smart defensive strategy to an offensive one that is likely already in place.
Michael Russo is a financial advisor with MetLife Premier Client Group in Milwaukee.