Serving retirement-income clients a big challenge for financial advisers: study

Most financial advisers have not made any significant changes to how they manage portfolios for retirement-income clients, yet they cite generating sufficient income as well as managing volatility and risk as some of their biggest challenges, a new study has found.

Less than one in 10 advisers have made significant changes during the past 12 months in terms of investment strategies and services, according to a study by GDC Research and Practical Perspectives. In addition, the study showed that two out of five advisers do not use fund providers they have no prior dealings with, while more than half of respondents do not use insurance providers they have not done business with previously.

At first glance, it may seem that the more than 600 advisers surveyed are complacent about the status quo, but the reality is they simply don’t know where to go next. “The challenge is that they don’t see solutions to help them in that area,” said Howard Schneider, president of Practical Perspectives.

The study noted that more than half of its respondents said retirement-income investors make up more than 50% of their clientele, as well as half of all assets managed. That is why clients approaching retirement need the help of advisers more than ever.

“Do they have a spouse? Do they have a pension? Do they have health insurance?… All these things come into play in retirement income, so it’s much more complex, much more holistic, and more difficult for advisers to deal with the client,” said Mr. Schneider. “Firms have been looking for years for better solutions, but they can’t find it.”

Yet advisers face a conundrum. The study finds that while advisers want simplicity in products, they also need to generate income, and complex products have a higher potential of accomplishing that.

INCONSISTENT INVESTMENT STRATEGIES

Mr. Schneider said that the lack of consistency in investment approaches among advisers underscores the need to find solutions. “Advisers don’t have a consensus on how to generate income,” he said. “It depends on the experience of the adviser and the comfort level they have on the various types of solutions. It also depends on their client needs.”

Close to half of advisers surveyed use the total return approach to generate cash flow for their retirement clients. That means they do not focus on income as an outcome for their portfolios, rather, they seek optimal total return within their client’s risk preferences. One in three advisers use the pooled or bucket approach, where they “deconstruct portfolio management into different duration or objective-based pools of assets,” according to the survey. For example, a short-term bucket of assets can be sold off during a market downturn.

Emerging compliance and regulatory concerns also can influence a portfolio’s construction. A quarter of the advisers, down from 35% in 2011, use the income floor strategy which is a hybrid of both the total return and pooled approaches, according to the survey. Advisers are shying away from this strategy because they are using less of variable annuities due to growing compliance scrutiny and less rider benefits, the survey noted.

The use of fee-based platforms, a trend accelerated by the Department of Labor’s new fiduciary rule, will increase, the survey said. According to the survey, more than seven in 10 advisers rely heavily on advisory or fee-based platforms, while 22% rely on traditional brokerage platforms.

“The DOL rule provides an opportunity for providers to repitch their ideas to advisers,” said Mr. Schneider. “Advisers have so much on their plate that it’s hard for product providers to get their attention. They’ll get their attention if they proactively communicate that they can offer something different that helps with the compliance and regulatory requirements.”

BABY BOOMER CHALLENGES

Advisers say dealing with baby boomers is a major challenge as they enter retirement age, which will require more training for advisers so that these clients can be properly served, according to the study.

“The baby boomers have unreasonable expectations that they can do whatever they want when they retire. They’ve been told that they can do whatever they want when they retire. Now they’re hearing from advisers that they need to work longer and delay taking Social Security,” said Mr. Schneider.

Despite the headwinds, advisers can turn to technology to help them cope.

“It’s only going to get more difficult, because of low-interest environment, and the challenges with the baby boomers,” said Mr. Schneider. “Technology is important for retirement-income clients if you want to scale your practice. It will help remove the administrative burden, and allow them to scale the number of clients they can serve. It requires them to have a deeper, broader look into their client needs.”

The study entitled “Advisors and Retirement Income Support – 2016” is a continuation of research that began in 2008 that examines how advisers work with individual retirement clients.