Gauging retirement readiness

Wall Street has become an industry of metrics

Wall Street has become an industry of metrics. Investment advisers can slice and dice results in dozens of different ways to measure performance against any number of indices. Marketing gurus can pinpoint target audiences by age, goals or hobbies. But so far, no one has come up with a satisfactory metric for measuring success in how firms are preparing for the retirement of baby boomers.

“How do you set up a measurement program when the market is so nascent?” asked Laura Varas, research partner with Financial Research Corp. in Boston. “Only about 6% of U.S. household investible assets are currently in this ‘retirement income’ mode.”

Two-thirds of members are staffing up in anticipation of the boomer retirement surge, according to a survey conducted for the Boston-based Retirement Income Industry Association.

“Firms are hiring in advance of asset flows,” said Elmer Rich, a senior partner at Matthew Greenwald & Associates in Washington, which conducted the survey. “However, they are somewhat puzzled about measuring success and where to go from here.”

FRC says that sales are the No. 1 metric for success, a troubling conclusion, according to Ms. Varas, author of a 2007 study, “Building & Positioning Retirement Income Solutions.”

“It can be very dangerous to define success as sales, because sales are just beginning to get going,” she said. Ms. Varas said that savvier firms are keeping tabs on customer loyalty and satisfaction, both among investors and advisers. About 20% of firms that FRC surveyed do not use sales as a metric. That group “includes some of the most admired companies in financial services,” she said.

Firms need to measure “mind share” — a squishier metric that involves customer satisfaction and other factors, said Mr. Rich, and goes beyond what the investor is thinking. It also involves measuring the firm’s processes to assess awareness and credibility.

The RIIA 2007 survey of members, presented at its annual meeting, revealed that more than half already had new product development in place; nearly everyone (91%) was working on developing new products or services.

Those numbers match findings from FRC, which showed that 33% of its respondents now say investment products are the top focus. That’s a big switch from 2005 when investment products were bottom of the list with just 11% citing them as a key priority. Back then, 50% of respondents named income planning services as their top concern. Now it ranks third at 17%.

“The planning approach is just not scalable,” Ms. Varas explained. Financial services executives realize they need products to address the mass market.

Hiring patterns mirror the shift in priorities. The 2007 RIIA survey concluded that 37% of members had already hired new product specialists; 26% had taken on new marketing personnel. Looking down the road, 57% of members said they will expand R&D; 66% said they would beef up marketing; 71% would add sales personnel, and 63% would add product specialists.

If the business plan is clear, so is the challenge to planners and advisers and their clients. Boomers comprise the largest cohort of retirees in history and the first generation to test the independence and responsibilities of a defined contribution world fully.

In an empirical analysis of affluent investors who are currently retired, FRC found that retirees with traditional pensions received 55% of their income from pensions, 20% from Social Security and just 18% from their own financial assets. By contrast, affluent retirees without pensions — a good proxy for boomers — may rely on personal assets for as much as 48% of their retirement income.

“It will go from being the third most important to being the No. 1 source,” Ms. Varas said.

Figuring out how to help boomers manage their retirement income is time consuming for anyone who isn’t wrestling with the mortgage crisis. The task is particularly frustrating because no one is sure how to measure whether their efforts will meet the needs of boomers. The traditional success metrics don’t feel like reliable gauges to determine whether the money Wall Street is spending on surveys and new business units will bring in the profits anticipated from boomers cashing in on their life’s work.

Mark Elzweig is president of Mark Elzweig Co. Ltd. (elzweig.com), an executive search firm specializing in the asset management industry. Nancy Miller, the firm’s director of client services, contributed to this article.

For previous Retirement Watch columns and the online column, On Retirement, go to investmentnews.com/retirementwatch and investmentnews.com/onretirement.