Data & Research April 27, 2011

Advisers Not Doing Enough for Affluent Gen X Investors

Affluent investors in the Gen X demographic – between the ages of 29 and 44 – using advisers saw significantly less growth in their portfolios last year than those without an adviser. 
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A Cogent Research study found that overall, Gen X affluent investors witnessed their investable assets grow by roughly 11% in 2010. Self-directed affluent Gen X investors–those who rely solely on their own knowledge and judgment–experienced 28% asset growth in 2010, while their peers who turned to a financial adviser reported that their investable assets climbed only 3% during that same time period.

This discrepancy in asset growth between advised and self-directed investors in Gen X is an anomaly; advised investors in every other age group measured in the study (1st Wave Baby Boomers, 2nd Wave Baby Boomers, and Silent Generation) were able to outperform their self-directed counterparts during the same time period.

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Therefore, it should not come as a surprise that less than half (42%) of advised affluent Gen X investors indicate they are satisfied with their primary financial adviser, a figure that is significantly lower than that of any other generation. In addition, roughly one-half (51%) indicate they are the on the fence or likely to switch primary advisers within the following 12 months–also significantly higher than for any other age group.

When asked to explain why they would be likely to switch primary financial advisers, Gen X investors cite dissatisfaction with the adviser’s communication, investment performance, and ability to navigate and react to changing market conditions.

Portfolio Differences 

Cogent Research found that self-directed Gen X investors have a greater allocation in equity-based products, such as mutual funds, offering greater reward along with greater risk. Their advised peers’ assets are allocated more heavily to lower risk/lower return investments (i.e., bonds) or products that are traditionally associated with extra fees and commissions (i.e., annuities).

“The discrepancy between advised and self-directed investors does beg the question as to whether advisers are re-purposing investments strategies designed for older investors with lower risk tolerance or whether they’re simply not paying enough attention to the unique needs of the this younger cohort,” said Steven Sixt, Project Director at Cogent Research and co-author of the study, “but either way, advisers are taking a big risk of alienating a generation of investors that are already inclined to go it alone,” he added.

Affluent Gen X investors represent roughly one-fifth (18%) of the overall affluent investor community and have acquired approximately 75% of the total investable assets of 2nd Wave Baby Boomers (ages 46 to 54). Yet, according to Cogent Research data, Gen X investors tend to have advisers with the lowest tenure and smallest books. “It’s time for advisers to capitalize on this growing, wealthy subset of the affluent community,” said David Feltman, Managing Director at Cogent Research. “However, tailoring the approach will be key, with a focus on the products Gen X investors favor, the risk tolerance they are comfortable with, and the platforms they gravitate towards” he added.

The study is based on an online survey of 4,025 affluent investors, including 738 affluent Gen X investors between the ages of 29 and 44. 

Perspectives April 27, 2011

Perspective: Better than “Good Enough”

I read with interest about Putnam Investments’ recent success with its online Lifetime Income Analysis Tool—a tool that projects how much income a participant’s savings may generate in retirement, that highlights savings gaps and, according to the report, motivated participants to raise their savings rates.
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Yet, once I spent some time with the numbers, I was less encouraged—disappointed in participants, perhaps. Putnam followed a sample of 10,000 participants and, of the 34% who made some sort of change immediately, 80% increased their deferral rate. Therefore, of the 10,000 people who responded immediately, only about 27% increased their deferrals! That’s certainly a success, but is it “good enough”?

I don’t mean to discount the reality that some participants increased their savings rate, and by a noticeable 23% (bringing the average deferral rate from 7% to 8.6%). However, why didn’t more people increase savings and why wasn’t the increase larger?

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We know the answer to both of those questions, actually; people say they can’t afford to do either one. I think there is, however, an opportunity for advisers to challenge those answers.

Look at this example for two things: one, gap analysis can work, and two, it is clearly not enough.

This is not the only example that shows participants react to gap analysis. Although, at first, our industry thought that showing participants how far they had to go would be harmful, the opposite generally has been shown—people want to save more; they are simply intimidated and unaware of what kinds of savings rates should be expected. Are you working with your plan sponsor clients and plan providers to show participants how much their savings will “pay” them? For all that our industry talks about retirement income and moving from accumulation to distribution phases—none of which will matter if participants don’t have enough savings—as an industry we should be trying to make this type of picture available from all vendors and discussed by all advisers.

So, if gap analysis showing people their likely shortfall isn’t enough to spur action, what are some other ideas? There was the SMART (Save More and Retire Tomorrow) program pioneered by Shlomo Benartzi and Richard Thaler; people who committed to saving more in the future stuck to it. Instead of relying on automatic programs (still not in place at a majority of employers), why not ask participants to commit to save more in the future? What about a calculator that reminds participants that deferring $1 of income won’t reduce their take-home pay by $1—they might be able to afford to put away a couple more dollars than they thought?

Of course, we might just try telling participants that saving only enough to receive the company match won’t be enough—a novel idea. It seems difficult, yes, but everyone has to face the truth sometimes—and better to face the truth when there is still time to change the outcome than when a participant is out of a job and income and has to rely on that paltry savings.

What we all need to keep in mind: While any increase in savings is laudable, is it “good enough” to provide a secure retirement?
 

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