Adding retirement income management presents operational challenges.

    Creating a retirement income management (RIM) component within an existing practice is a popular topic these days. You can hardly pick up any financial practice publication without some mention of it. Much has been written about the potential pitfalls. Yet, few answers have been offered on how to actually run a practice successfully. At least part of the reason for this may be that this is uncharted territory for many financial advisors.

For many years, financial advisors have had the "luxury" (if you will) of dealing with accumulation-type clients. With rising assets and long-term goals to address, little attention has been paid to short-term cash-flow issues (of the financial advisor's practice). But with the looming baby boomer retirement issue at hand, many financial advisors are now faced with the possibility of declining revenues should their fees be based solely on a percentage of assets under management (AUM) with a client on a spend-down plan during retirement. Therefore, service pricing has been pushed to the forefront as an issue for those advisors to confront.

However, pricing is not the sole issue for advisors to deal with. There are several issues unique to Retirement Income Management (RIM) practices that require attention. Four issues that come to mind are:


Service Standards

Employee Retraining

Client Training


The issue of pricing is much larger than purely how you charge for your services. As any competent business owner will tell you, it is not about the gross, but the net. Margin might be viewed as the difference between gross and net. What many advisors are faced within the RIM model is the potential for shrinking net profits or margin compression. This may be caused by a variety of factors, not the least of which might be a reduction of gross revenue against the backdrop of stable (or rising) fixed costs.

The knee-jerk reaction to this is usually to reduce expenses, cut back on staff or find other ways to spend less. The more logical answer is to look at how you set your fees, and to also find ways to be more efficient with your expenses. The question that needs to be asked of the financial advisor is, "If you are basing your fees on a percentage of AUM and the asset base is declining for a client, are you (or the services you provide) worth less to that client?" For most, the answer is that, if anything, the services are worth more during this critical period in a retiree's life. Therefore, perhaps you should revisit how you charge for your services.

An a-la-carte pricing system, where asset management (for instance) is broken out from advice services and charged differently, might tend to smooth out the revenue stream while providing a client with a better understanding of what those charges represent. Many financial advisors have turned to a fixed fee (or hourly fee) for advice services. Some have even adopted modified forms of this for asset management as well. The result for the RIM practice is a reduction or elimination of shrinking net profits or margin compression. For those who believe that margin compression is the sole result of competition from other financial practices, the answer may lie in more fully developing their value proposition and sufficiently differentiating themselves from such competition (and not necessarily reducing your fees).