Service Model
Retirement income is the latest industry buzzword as America faces the impending retirement of millions of Baby Boomers—and advisers, providers, and plan sponsors have reason to be involved. About half (53%) of pre-retirees are concerned about outliving their retirement savings, and 61% admit they have not made a formal calculation of how much they can afford to spend monthly to prevent doing so, according to Fidelity Research Institute’s report, “Structuring Income for Retirement.”
“There’s a generation heading into retirement and they do need guidance,” admits Kevin Waldron, First Vice President Investments, Senior Resident Director, Merrill Lynch.
Rex Linkenbach, a registered representative with Princor Financial Services, agrees that retirement income is a good business idea. “Without a doubt, there is a tremendous opportunity and I think there is a need for good, sound advisers in this area,” Linkenbach says. “As long as a person understands there will be additional work associated with folks in this age bracket, it can be a very rewarding field.”
Business Model
Along with the decision to start a retirement income business is the choice of what the business will look like. What products and services will advisers offer? Will the focus be on selling income products, such as annuities, or should an adviser focus on providing advice for investment strategies as individuals change their goals from accumulating savings to drawing income? For retirement plan advisers, there are more questions: Will the adviser add a wealth management business to his existing practice, or partner with others? How will this be marketed to plan sponsors and participants? Will the practice serve only participants coming from inside a client plan, or will individuals from outside the plan be welcomed?
Troy Hammond, President of AmeriFlex Financial Services, a member firm of National Retirement Partners (NRP), says that, although he has a retirement income group within his practice that accounts for about 50% of his revenue, he does not do wealth management sales. Instead, his firm focuses on the accumulation and decumulation concepts and helps participants understand whether or not they will have enough money in retirement.
Advisers who are affiliated with a wirehouse can find wholly different challenges from an independent in positioning a retirement income business. Waldron points out that wirehouses frequently provide advisers with training and access to a variety of products and solutions, while there may be a higher cost for independent advisers who have to build their own toolboxes. Waldron says advisers should be equipped with retirement income and investment products and should have asset-allocation modeling, retirement income forecasting and reporting, and investment proposal tools.
According to Linkenbach, the key for independent advisers is to budget for technology and professional development, since these are ongoing costs. “Developing a retirement income planning practice requires advisers to significantly increase their knowledge base, enhance their level of service, and improve their practice efficiency, which potentially can translate into elevated practice expenses,” he says.
Linkenbach admits that the expense of providing retirement income services (and a different fee structure) is what makes many advisers question whether they want to get into the business. In addition, because retirement income consulting is more time consuming, advisers may find it necessary to reduce the number of clients they serve—focusing on their most valuable clients in order to maintain profitability—which could affect revenues, Linkenbach notes. However, since clients may hold assets in various vehicles with different financial institutions they should consider consolidating. Linkenbach suggests advisers try to win clients’ outside assets and hope to offset the additional expense of their retirement income practice.
Waldron suggests the fee structure will be client-specific. Depending on the solution for a particular client, an adviser may make his money from hourly fees for advice and planning, revenue from selling products, or both. “You want the client to say “This makes sense and is appropriate for me,”” Waldron says.
Retirement Income Solutions
An adviser must have a variety of solutions in his or her arsenal to meet the unique needs of each individual client. According to Waldron, advisers should focus on selling knowledge and expertise, not just products.
Linkenbach adds that, to do retirement income correctly, an adviser must find out what the client’s goals are and what lifestyle in retirement a client is looking to have. The adviser must also consider all the pieces a client has to work with, not only retirement plan assets, but also outside investments, he says. This information will clue an adviser in to the best solution for the individual and whether that solution includes products, investment planning, other services, or a combination of things.
A retirement income solution should establish different pools of money for different purposes, which would call for a variety of products or services, says Linkenbach. For example, the pool for monthly living expenses could be funded via an annuity or Social Security, while funding for emergencies, medical costs, or leisure could be generated with a mutual fund portfolio or other products, he explains.
Though annuities are being enhanced by both improved features and lowered costs and are increasingly touted as a solution for providing lifetime income in retirement, Linkenbach says different client needs can point to other products an adviser should be able to provide, such as mutual funds, long-term-care funding vehicles, or reverse mortgages. Waldron adds that an adviser should be able to provide access to a variety of investment vehicles, not just those that produce income, as clients also will need a strategy to deal with inflation. An adviser’s toolbox should include fixed-income products, as well as equity products, various types of annuities, and managed accounts. However, it is important to examine what investors get in return for their money; an adviser must know if there is value, Hammond says.
Gaining Clients
As the retirement income service market grows, advisers must decide how to differentiate themselves and attract clients. The most obvious start for building a client base, according to Linkenbach, is with established clients for which an adviser is providing retirement savings accumulation services. Structuring the retirement income practice as a natural outgrowth of the retirement plan practice will allow current clients to view the retirement income practice as the appropriate place to house their assets and seek advice for the distribution phase, he adds. Knowing they do not have to go anywhere else also will ease some of the anxiety participants may feel when transitioning to retirement.
Waldron agrees that the move from retirement plan adviser to retirement income consultant is a natural one, and he explains that keeping the relationship with current clients is “vital to every planner’s business.”
Although he acknowledges that he has not had plan sponsors, in their plan sponsor role, ask for retirement income planning for their employees, Hammond says that, when he discusses it with the retirement plan committees (who happen generally to be in their 50s), the committee members all want it, and they then realize the value of the offering.
Especially for independent advisers competing against wirehouse advisers, it is important to establish relationships with retirement plan participants that will feed into a retirement income business, Linkenbach explains. He decided to brand himself as an individual retirement account (IRA) expert to stand out.
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 explains. “[Therefore,] you have to start the process before their last paycheck is arriving.”
Establishing yourself as an expert is vital, says Waldron; obtaining credentials, such as CFP or CRPC, shows an adviser has knowledge and expertise in the retirement income area.
Despite the challenges, retirement income provides a huge opportunity for advisers. “Any adviser in the business should want to focus on this,” Waldron asserts.