U.S. demographic trends build a strong case for adding retirement income planning (RIP) services to your business. An estimated 8,000 baby boomers are turning 65 each day and despite years of saving, many of them are clueless about converting their savings to a sustainable retirement income.
Phil Harriman, CLU®, ChFC®, RFC, with financial advisors Lebel & Harriman LLP in Falmouth, Maine and a past president of the Million Dollar Round Table (MDRT), saw an opportunity in those demographics. “What that means is probably for the next decade the largest growing segment of our population is heading headstrong and headlong right into the final phase of their working years and will need to have a plan to maintain their lifestyle,” he says.
There’s another reason to consider income planning: an increasing number of clients and prospects are seeking it. If you don’t provide it, you could put yourself at a competitive disadvantage. Dana Anspach, CFP®, RMA (SM) with advisory firm Sensible Money in Scottsdale, Ariz., receives several inquiries about her firm’s RIP services each month from other advisors’ clients. Those prospects often express concern that their advisor isn’t well versed on the topics that they need to address as they enter retirement, Anspach says.
Anspach sees this occurring most frequently in cases where the advisor handles a relatively small account for the client who keeps the bulk of his or her assets in a company retirement plan. The advisor assumes that the client automatically will roll over those assets to the advisor’s firm upon retirement, but the client has other plans. “If that advisor does not have the (RIP) expertise, that’s when they lose the business,” she says. “At that phase the client stops and goes, ‘Hmm, you know, maybe I ought to look around because you only retire once and this is the rest of my life.’ ”
Therefore, offering RIP can increase the odds of retaining retirees’ business. Brian Heckert, CLU, ChFC, AIF® with Financial Solutions Midwest LLC, a financial advisory firm in Nashville, Ill., works with 401(k) plans that have about 4,000 participants. He began to receive numerous RIP-related inquiries from participants and recognized the opportunity to adapt his business. In response, over the past 10 years his business has evolved to an almost exclusive focus on 401(k) plans and RIP.
Different skills needed
Claiming RIP expertise without the requisite skills is a bad idea because knowledgeable prospects and clients eventually will spot unqualified advisors. A better approach is to recognize how RIP differs from pre-retirement wealth accumulation and then work to fill the knowledge gaps. Wade Pfau, Ph.D., CFA, professor of retirement income at The American College in Bryn Mawr, Pa., says one key distinction is that the approach of maximizing an investor’s risk-adjusted return with the goal of growing wealth “doesn’t really apply post-retirement.” The reason, he says, is that wealth maximization is no longer clients’ main priority. The focus instead becomes supporting a sustainable income over an uncertain time horizon. “It’s a very different problem from how do you go about ensuring that every year the income is going to be there for this unknown lifetime,” he notes. “That requires a different framework than the traditional modern portfolio theory.”
Pfau points out that while traditional assets like stocks and bonds are part of the retired client’s asset allocation, advisors also need to understand how income sources like annuities and pensions can influence clients’ finances. Clients who receive Social Security and pension benefits, for example, can have very different investment portfolios than retirees who lack those reliable income sources. Additionally, the decision of when to start taking Social Security benefits is another factor that can have a major impact on the client’s lifetime finances.
Retirement income planners should also look beyond financial assets to include human capital and social capital. Some clients will have the skills and experience to continue working (i.e., human capital), allowing them to preserve their savings longer and delay the receipt of Social Security benefits. Clients with strong family and social support (social capital) also face a different situation than those without these resources. Traditional pre-retirement wealth management overlooks these areas, Pfau maintains. “There’s a lot more to think about when you’re building the income strategy for retirement and you want to draw on all those different household resources,” he says.
Anspach, who holds the RMA—Retirement Management Analyst(SM)—certificate from the Retirement Income Industry Association, believes that obtaining professional education is the first step for a successful transition to RIP. The available educational programs typically cover Social Security, planning for health care and Medicare, and the unique risks and emotional challenges retirees face, among other topics. Besides the RMA, other programs include the Certified Retirement Counselor® (CRC) from the International Foundation for Retirement Education and The American College’s Retirement Income Certified Professional ® (RICP).
The programs’ content overlaps somewhat but they differ in terms of delivery methods, costs and academic focus. Both the CRC and RICP are self-study programs. According to the programs’ websites, the CRC has four modules with 15 to 25 hours of study time per module. Study guides cost $450 and the 200-question multiple-choice exam costs another $450. The RICP program includes three courses; estimated study time is 30 hours per course to watch the online lectures and videos with an additional week suggested for review. That estimate does not include the time required to read the outline. Each course requires a passing grade on a 100-question multiple-choice test. Tuition is $640 per course or $1,566 to prepay all three courses.
RMA students must work with a participating university. As of late December 2013, the program’s website listed Boston University, Salem State University and Texas Tech University as participating schools. Boston University also offered an online course option. Expected study time is 120 hours with a 100 multiple-choice exam. Costs vary but range from $1,300 and higher.
Apart from convenience and cost, another factor worth considering is the level of detail a course provides on the different income-generation methods: systematic withdrawals, time segmentation (“bucketing”) and essential-versus-discretionary expenses. For example, the RICP attempts to cover all the methods, says Pfau, while the RMA concentrates more on essential-versus-discretionary expense planning. According to the CRC’s website, the program “demonstrates a mastery of both retirement accumulation and distribution planning;” the program’s final module (of four) covers the fundamentals of retirement income planning.
Acquiring the requisite skills and knowledge is the first step; adding RIP services to your business is the next. Harriman uses the R.I.S.K.™ (Retirement Income Survival Kit) retirement income-planning program developed by ValMark Securities Inc., his broker-dealer. That program considers the risks retirees face, such as sequence of returns, longevity, health and inflation, among others. Harriman’s firm has also purchased additional financial planning software and staff members have undertaken RIP training. That allows them to help clients understand the sources and uses of their retirement incomes, Harriman explains: “Do they really have enough income coming in to support the lifestyle that they expect to lead? And, we talk about lifeboats. What if you live too long, what are you going to do? What if you or your family member spouse needs medical assistance? Do you have lifeboats to get into should the unexpected happen?”
Heckert also has invested in staff training and software. His firm now uses the eMoney program to aggregate client accounts and model clients’ incomes. Plus, he implemented a major change in the firm’s business model. “About 10 years ago we made a large effort to get out of a commission-driven practice and move exclusively to fee-for-service or assets-under-management (AUM) model,” he says. “So, all three of those things (staff, software and business model) came together as we started moving toward an income-generation practice.”
There is a potential business risk to consider before transitioning to RIP. Anspach points out that while RIP clients typically work to maintain their assets, those assets may deplete as clients age. For advisors working on commission or charging under the AUM model, that means these accounts are likely to produce less revenue than for pre-retirement clients.
Another business challenge to these models is that much RIP work focuses on process and planning instead of product. For instance, retired clients may need advice on Medicare plan selection or Social Security. Commission and AUM compensation models aren’t designed for pure planning issues like these, which may require advisors to adapt their business models.
That realization led Heckert to modify his approach and he cites an example. “If you provided a fixed-income strategy and put it into a product that just pays an interest rate, you can’t charge a fee because you’re not providing any extra value,” he says. “But if you do some legitimate work hedging for inflation and involving some equity into a portfolio...you have the ability to not only charge a fee but add value and a little bit extra yield to a portfolio. So selling a product becomes secondary and I would argue even insignificant to making sure the clients understand the process.”
Worth the effort?
Advisors who already have successful pre-retirement planning and wealth management businesses may question the value of adding RIP. That would be a mistake, Harriman maintains: “I think if you’re not gearing up or already in a mode of delivering that type of advice, you’re missing the largest segment of the population in the history of the world to go into their retirement years, (and) you’re missing the opportunity to continue to serve them.”