In Practice September 27, 2007

PA NC: Should Retirement Income Be a Part of Your Practice?

The conversation about retirement income should not be an at-retirement discussion.
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According to panelists at the PLANADVISER National Conference in Orlando, Florida, the need for retirement income discussions is large now, and will only grow with the Baby Boomers.

Consumers are looking to talk to someone about income planning about 10 years prior to retirement, but don’t know where to go, said David Liebrock, Executive Vice President, Retirement Business of Fidelity Investments Institutional Services Co. “It is not a question of if this a trend,” Liebrock commented.

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Aaron Hagwood, VP Wealth Advisor of The Hagwood Tomoda Group at Morgan Stanley says his practice used to be 65% 401(k) but he has seen that decrease as the amount of wealth management, specifically retirement income work with retirement plan participants, has increased. Now, he says, retirement plans probably only account for 50% of his practice’s revenue.

Troy Hammond, President of AmeriFlex Financial Services, a member firm of NRP, said that although he has a retirement income group within his practice that accounts for about 50% of his revenue, he doesn’t do wealth management sales. Instead, he says, his firm focuses on the accumulation and decumulation concepts and helps participants understand whether or not they will have enough money in retirement.

Although he acknowledged that he hasn’t had plan sponsors, acting in their plan sponsor role, ask for retirement income planning for their employees, Hammond said that when he discusses it with the retirement plan committees (who happen to generally be in their 50s), the committee members all want it, and so then they realize the value of the offering.

However, the value of the offering is in approaching individuals before they retire, so Hammond and his practice have begun retirement planning seminars that they do well before retirement. “A lot of people are withdrawing funds pre-retirement,” Hammond explained. Therefore, “you have to start the process before their last paycheck is arriving.”

A Retirement Income Practice

Brand yourself as a retirement income specialist, Liebrock told the adviser attendees, and make yourself known to consumers. Although not all retirement plan advisers are looking to establish a retirement income practice, and many still plan to focus solely on the qualified plan space, Liebrock said advisers should realize that there is a significant opportunity cost to not getting involved in this space. “If you don’t capture rollovers,” he said, “what is the leakage or withdrawal rate from 401k plans?”

Account aggregation is a large part of building a strong retirement income practice. Both Hagwood and Hammond said that they have minimum account sizes necessary to work with their practices. However, oftentimes, if the adviser has established a good rapport with the retirement plan participants, they will want to work with that particular adviser and then the adviser might find that although a participant only has $50,000 in the one employer’s retirement plan, there are a few accounts from previous employers that can be rolled over, or an old IRA, or other assets that a participant will be willing to combine to meet a minimum account size.

Working with retirement plans lends itself naturally to a practice’s wealth management growth as well, Hagwood said, because the referrals that come from workers are invaluable. Referrals are a large part of Hammond’s business as well, he commented: “60-year-olds with big balances hang out with other 60-year-olds with big balances.”

The wealth management part of his practice is thriving, Hammond said, and advised those in the audience that if they were to broaden their retirement plan practice to include a retirement income offering, to “prepare for growth and be prepared from the beginning.”

Product Offerings

Although there are many product offerings out there, “you don’t want to pigeonhole people into products,” Liebrock warned, reminding advisers that they have to think through the fiduciary issues, including risk, cost, and limitations, of all products – both in-retirement products, such as the new annuities packaged as a defined contribution investment, and the at-retirement solutions.

Hammond said he uses many prepackaged solutions, and sees an increasing number of providers with new retirement income product offerings. However, it is important to examine what an investor gets in return for their money; an adviser must know if there is value, Hammond said.

In recognition of each individual’s varying circumstances and needs, Hagwood builds an individualized portfolio for each participant that includes insurance products alongside other investments.

 

Data & Research September 26, 2007

Par for the Course?

It is generally thought that competitive pressures bring out the best in us, that we come with our best “game″ when we know that that is what it will take to win.
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However, that sense is challenged by a new study that found no such connection – at least on the golf course.

The study, aptly, if somewhat inauspiciously titled “Peer Effects In The Workplace: Evidence From Random Groupings In Professional Golf Tournaments,’ considered the performance of playing partners in professional golf tournaments as a proxy for peer effects in the workplace. And, contrary to recent evidence on supermarket checkout workers and soft-fruit pickers (who admittedly are performing for different stakes than Tiger Woods), the authors (Jonathan Guryan, Kory Kroft, and Matt Notowidigdo) said they found “no evidence that the ability or current performance of playing partners affects the performance of professional golfers.’ This despite the fact that many PGA players themselves perceive these so-called peer effects to be important.

In a typical blue-collar work setting, individuals can learn by example from co-workers how to best perform their tasks, and thus improve to the level of the best worker in the group, they may be motivated to perform at a higher level simply by trying to keep up with the rest of the group, and even, in situations where a production process is involved, they can by physically “motivated’ by the simple need to keep up (what the researchers termed a “production complementarity’).

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As for the golf setting, the study’s authors acknowledged opportunities for players to benefit from exposure to the expertise of their peer group; the ability to observe the ball flight of others in the playing group, the opportunity to learn how a skilled putter manages to deal with the various greens – even the challenge of attempting to match the performance of another member of the team on a given hole.

“Shocks” Treatment

Indeed, an interesting aspect of the study was that it did find a positive effect of partners’ score on individual scores – but were able (through a mind-numbing regression analysis) to discount that result not to the influences of the teams themselves, but to what they found to be “common shocks’, things like variation in weather and crowd size. So, while pairings did seem to perform well together (hence the sense that good partnerings lifted the performance of everyone in the pairing), the researchers were able to discount that to the environmental impact of playing at the same time in the same elements (“…we are able to reject positive peer effects of more than 0.045 strokes for a one stroke increase in playing partners’ ability.’).

Having been able to factor out the apparent peer influences, the study’s authors nonetheless offered several reasons for the contrast between the findings of their study, and the others. They suggest that strong performance-based financial incentives could provide incentives that transcend the influences of a peer group, that there is “heterogeneity’ in how susceptible individuals are to social effects – and that those in “elite professional labor markets’ are simply not as subject to those peer influences, and that workers learn with professional experience not to be affected by social forces – that, in effect, “…some people are better than others at avoiding the social effects…’
Another reason for the apparent lack of correlation can be found in the structure of the game of golf itself. In a golf tournament the object is to score the lowest, regardless of with whom you are playing; that pay is based on relative performance – but that performance is compared to the entire field of entrants in a tournament, not just those in the individual playing grouping. “In a golf tournament,’ they note, “there is no reason (other than better information about how the player next to him is doing) for a player to care more about the performance of his playing partner than about anyone else in the tournament.’
The study was published by the National Bureau of Economic Research. You can find out more about it at http://www.nber.org/papers/w13422

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