Market slump a catalyst for retirement income products
Although retirees have been hit hard by the recession, the world of retirement income products may actually be…
Although retirees have been hit hard by the recession, the world of retirement income products may actually be better off in the long run as a result of the downturn, pundits predict.
In recent years, financial services providers have flooded the market with new annuity and managed-payout products in an attempt to capture assets from the growing population of retirees. In doing so, however, financial institutions have created a crowded and cloudy marketplace for both financial advisers and clients, one that can make it difficult to settle on a particular product, observers said.
“But now, there’s basically a forced opportunity for the providers to take a pause when thinking about the new retirement products they’d like to develop,” said Tom Modestino, a senior analyst at Boston-based Cerulli Associates Inc. who specializes in retirement practices.
“And not only will this allow advisers to become more familiar with the offerings that are already available, but providers now also have a chance to develop more thoughtful, and less narrow, retirement income products,” he said, noting that many of the offerings on the market don’t change as in-vestors age or as their need for income changes.
With insurance companies and asset management companies cutting costs during the past year, pro-viders are rolling out fewer new retirement income offerings, Mr. Modestino said. Instead, they are more focused on understanding the specific needs of retirees — and advisers — before they introduce a new set of products.
For instance, Cerulli found in a recent survey that 54% of 26 asset management companies interested in offering retirement income strategies were devoted to conceptualizing products and hadn’t begun developing them yet.
The survey results “could represent the start of the next generation of retirement income products,” Mr. Modestino said.
Indeed, this could be an inflection point for retirement income products, which are expected to play a critical role in the investment portfolios of many of the roughly 78 million baby boomers who are slated to retire over the next 15 to 20 years.
“Decumulation strategies, over the next two decades, will likely have the same level of importance and emphasis that asset allocation strategies had in the “80s and “90s,” said Lynne Ford, the Charlotte, N.C.-based executive vice president and head of the retail retirement group for Wells Fargo Advisors LLC in St. Louis.
As a result, retirement industry observers are urging financial services companies to focus on process over product when attempting to deliver retirement income solutions to advisers and their clients.
“Most providers have not thought about how their products will fit into an adviser’s total process for constructing retirement income portfolios,” said Howard Schneider, president of Practical Perspectives LLC, a research and consulting firm in Boxford, Mass.
Data from Cerulli support this observation: Financial services companies recently polled by the research firm ranked “evolving adviser business practices” as the least significant driver of product innovation.
Just 32% of providers said that advisers’ changing needs and de-mands had significantly affected their product development plans. On the other end of the spectrum, 82% of financial services firms said that the general need for retirement income was the primary driver of product innovation.
Many retirement income pro-viders have taken a one-size-fits-all approach to developing their products, focusing only on meeting a portion of investors’ needs during retirement, Mr. Schneider said.
Many products, for instance, focus on delivering a specific level of guaranteed income throughout a retiree’s life — without offering the individual the ability to benefit in any gains from the equity markets over that time. “The idea of efficiently packaging a guarantee with a growth component is the Holy Grail of retirement income solutions,” Mr. Schneider said.
During the current pause in new product development, Mr. Modestino suggested that broker-dealers may want to consider bringing together insurance and asset management products onto new “comprehensive re-tirement income platforms” for the adviser community.
Advisers can choose from a number of platforms akin to mutual fund managed-account offerings that would be built around investors’ ages, risk tolerances or wealth tiers, he said.
“They don’t have to reinvent the wheel here,” Mr. Modestino said. “They could simply vet a universe of fragmented products for advisers, and bring them together on a coherent platform.”
E-mail Mark Bruno at [email protected].
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