More than 75 million baby boomers are either in or nearing retirement, and many of them are looking for
financial planning advice for their new phase of life. On the surface, it seems like a natural fit between investors looking for advice and advisers willing to give it.
Investors, who have accumulated savings in their employer-sponsored retirement plans and individual retirement accounts for decades, want to know how to transform those nest eggs into reliable retirement income streams. U.S. retirement assets total nearly $25 trillion today, including a record $7.6 trillion in IRAs and $6.8 trillion in defined-contribution accounts, according to the Investment Company Institute.
Advisers, who are anxious to capture a share of the lucrative 401(k) and IRA rollover accounts, are gearing up for an onslaught of new clients. But the changing landscape of retirement-income planning can be a complex and time-consuming endeavor. In addition, persistent low interest rates have called into question the viability of overweighting traditional fixed-income securities as a vehicle for generating retirement income.
“Advisers are grappling with how to construct retirement income strategies that are personalized, dynamic, flexible and tailored to retirees' individual needs,” according to a new report published in the latest IMCA Research Quarterly, a publication for the 10,000 members of the Investment Management Consultants Association.
“All these pressures are impacting financial advisers and will shape how they deliver retirement-income planning and support in the future,” according to the report, which was published in partnership with Cerulli Associates Inc.
ROLLOVER MAGNETS
Existing client relationships are key to attracting rollovers. Cerulli estimates that 73% of rollover assets go to providers with which investors have a current relationship. This is especially true when the existing relationship is with an adviser.
The share of rollover assets to an adviser account for more than half (54%) of all rollovers and tend to be more than twice the size of rollovers to a direct provider, according to the report. Rollovers to adviser accounts averaged more than $120,000 compared with less than $60,000 for direct providers.
“Rollovers recently have been subjected to regulatory scrutiny because lawmakers have been questioning IRA providers' sales inducements when assets leave [defined-contribution] plans,” the report noted. “However, advisers likely will be least impacted by heightening regulatory intensity because investors will value the holistic view of the adviser relationship versus the potential fee savings of remaining in their former plans.”
WHAT INVESTORS WANT
The majority of investors (58%) value the ability to withdraw funds at their convenience, including additional funds if needed, as an important feature in retirement income plans, according to the report. That is more than four times the level of investors who said they were looking for a guaranteed level of monthly payments.
“With the advent of goals-based planning, advisers and investors alike are placing emphasis on the fluidity and dynamism of financial plans,” the report said. It noted that in today's retirement-planning realm, the traditional 4% rule — the premise that a retiree could withdraw up to 4% of an initial portfolio per year, adjusted for inflation, and be relatively safe from running out of money — may no longer apply.
INVESTMENT CHALLENGES
With interest rates remaining near historic lows and equity markets continuing to generate strong returns, several traditional retirement income strategies have fallen out of favor with advisers.
Fixed-income funds and individual securities face the dual head winds of anticipated interest rates hikes and increased life expectancies of today's retirees. Similarly, new annuity sales have declined due to their inherent complexities and less competitive guarantees, compared with even a few years ago. However, three-quarters of financial advisers, led by insurance company representatives and independent advisers, continue to hold annuities on their books.
Dividend-paying stocks and equity mutual funds were the most commonly used retirement income strategies in 2015, according to the report. Nearly half of IMCA advisers (47%) reported using
dividend paying stocks and 38% said they used
dividend-paying mutual funds. By turning largely to
dividend-paying equities, advisers have attempted to deliver current income for spending needs and higher expected returns to address increased longevity risk.
Although reallocating a portion of a client's portfolio from fixed income to
dividend-paying equities may increase total risk, this may be appropriate given a client's life expectancy. It is also important to retain a total portfolio perspective by considering the trade-offs between interest rate and equity risk factors, as well as the diversification benefits and inflation protection created by adding equity exposure to portfolios historically dominated by fixed-income positions.
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