Data & Research September 9, 2015

Does Inheritance Taper Retirement Uncertainty?

The Center for Retirement Research at Boston College asks what part an inheritance plays in reducing retirement uncertainty.
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It’s commonly known that the nation has a substantial number of households considered at risk for an uncertain retirement. The Center for Retirement Research at Boston College (CRR) created a National Retirement Risk Index, which measures retirement preparedness and found that more than half of households may be unable to maintain their standard of living in retirement. 

Using the retirement index, CRR set out to investigate the effect, if any, of inheritances on retirement savings. Today’s working households stand to inherit substantial wealth, the center said in its recently released brief, “How Do Inheritances Affect the National Retirement Risk Index?” The question is, would it make a significant difference to Americans in retirement?

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After a discussion and description of the index, the brief examines the inheritance questions in the Federal Reserve’s Survey of Consumer Finances to look at the relationship between inheritance and the retirement status of households in the index.

The central question is how many more households would be unprepared for retirement without any inheritance. To answer this, the CRR set out to eliminate inheritance numbers from the data, first by projecting the value of the inheritances received to age 65 and by calculating the annuity income at age 65 that is generated by inherited wealth.

The results from the CRR’s methodology, fully described in the brief, show that inheritance has but a modest effect on at-risk households. Households in the top and bottom thirds of the income distribution are less affected by taking away inheritances than those in the middle, according to the brief.

While those in the top third are the most likely to receive inheritances, they are also the least likely to rely on them for retirement preparedness because they can turn to many other financial resources. Those in the bottom third are less likely to receive any inheritance at all. Since those in the bottom third that do receive an inheritance are already at risk for retirement insecurity, the inheritance does little to reduce their at-risk status.

NEXT: One group could see more of a difference when they inherit wealth.

Middle-income households seem more reliant on inheritances for retirement security than those above, and are more likely than those below to actually receive one and rely on it for making the difference in retirement preparedness.

While inheritance barely moves the needle on retirement preparedness for the population as a whole, it does have a greater effect on the recipient population. Middle-income household retirement insecurity grew, from 42.6% to 50%, when the inheritance factor was eliminated, a 7.4 percentage point change.

CRR’s conclusion is that while inheritances improve the financial situation of households that do receive them, their impact on the overall retirement risk status of the population in the index is quite modest. The result holds true both when removing inheritances from households that have received them and when expanding the number of households that might receive them in the future.

When inheritances are removed, the modest impact is based on the fact that few households are affected, since only about one-fifth of households have actually received one. Then, too, those that do receive an inheritance reap a relatively small amount compared with the total retirement income needs of the household. Most households receiving an inheritance were already well above the index’s “at risk” cutoff, so removing the inheritance is not enough to put them at risk.

In the case of increasing inheritances in the future, the effect is modest because only one-fifth of households receive them; the amounts are relatively small; and many of the additional households assigned an inheritance were already “not at risk” for retirement, so giving them more money obviously does not affect that status.

The bottom line, according to the report’s conclusion, is that, while anything that boosts households’ assets is beneficial, inheritances are unlikely to play a significant role in changing retirement readiness.

“How Do Inheritances Affect the National Retirement Risk Index?” can be accessed from CRR’s website.

Data & Research September 9, 2015

Millennial Clients Can Be Picky Advice Shoppers

More than one in 10 Millennials seeking professional financial advice has fired an adviser during the last year. 
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A research study from Spectrem Group finds wealthy investors “most often fire advisers for a lack of proactive ideas, while less wealthy investors fire advisers for a lack of frequent contact.”

Beyond this theme, however, Spectrem says the reasons behind a decision to fire an adviser vary greatly depending on factors such as age, net worth and investing objectives. The study, “Why Investors Switch Advisors,” reveals more than half of high net worth investors switched financial advice providers within their lifetime. Nearly a quarter switched in the last five years.

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Unsurprisingly, Millennials are more likely than the older generations in the workforce to believe an adviser should provide information and services through mobile technology. Advisers should also “understand social media,” according to younger investors, but limits prescribed by the Securities and Exchange Commission continue to hold advisers back from fully leveraging the potentially promising communication channel.

It’s a big enough issue that the SEC issued a series of investor bulletins in the last several years, warning of the risks of social media fraud. At the same time, social media is undeniably joining traditional financial news media as a key source of information used by investors, both individual and institutional.

It makes sense, Spectrem says, that investors who are more involved with their portfolios and enjoy investing are more likely to switch advisers than those who don’t have the time or interest to be deeply involved with their investment portfolios. The former group is looking for advisers “who stay in contact with them in addition to offering new investment ideas and forward thinking,” Spectrem says.

Other recent research from Spectrem Group finds a majority of investors are critical of the communication tools advisers rely on to build relationships. Notably, Spectrem finds less than 60% of investors consider any of the communication tools used by investment providers and advisers to be of “excellent” quality. 

NEXT: Preferred communication tools

“The communication tools in question include account statements, face-to-face meetings with advisers, the [written] financial plan, access to the firm’s management or experts, newsletters and blogs,” Spectrem Group explains. “An ‘excellent’ rating was hard to come by.”

In fact, only 58% of investors with a net worth between $100,000 and $1 million say their account statements and other communications are “excellent.” Those investors with more than a million dollars displayed nearly the same level of satisfaction, suggesting some advisers who have won these coveted clients aren’t exactly delivering stellar service.

More than half (54%) of investors with more than $100,000 saved said that current face-to-face meetings with advisers were “excellent,” and just slightly more (55%) millionaires reported the same. “All other communication tools dropped below 50% excellent,” Spectrem notes.

“In regards to the written word, newsletters were deemed ‘excellent’ by only one-quarter of investors,” the research shows. “Even worse were blogs, with only 10% of blogs being deemed 'excellent' by mass affluent investors and only 9% deemed ‘excellent’ by millionaire investors.”

While excellence in communication is lacking, Spectrem also shares some encouraging results. Researchers find very few investors rated adviser communication tools outright poorly, “with overall percentages always ranging around 5% or below.” Newsletters seem to be favored somewhat more by older investors, while blogs are not well received among the group. 

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