Their bear-market portfolio declines may mean a change in plans.

While it would be hard to single out any one age group as having suffered the greatest losses since the stock market downturn that began three years ago, pre-retirees, which the AARP defines as people from 50-61, have to be near the top of the list for this dubious distinction. Not only have they seen their portfolios and 401(k) plans shrink dramatically, but they have suffered a serious psychological blow as well.

Since the stock market peaked in early 2000, many pre-retirees have gone from thinking they were in great financial shape-and might even retire earlier than expected-to downsizing their dreams and facing the reality that they may have to work beyond the age of 62. And unlike the under-50 set, pre-retirees do not have a lot of time to make up the lost ground and money. Financial advisors working with pre-retirees may not be able to repair the financial damage, but you can help heal the psychic wounds-and improve your client relationships with this large and affluent group of investors.

Wealthy-And Anxious

By most accounts, the 76 million Americans over the age of 50 currently represent the wealthiest group of investors. But that does not mean they have been immune to financial pain over the last few years. The stock market's decline has affected almost every one of their investments, with the possible exception of bonds and real estate. And after years of stratospheric growth, the value of 401(k) plans has declined. A recent study by the non-profit Employee Benefit Research Institute (EBRI) found that the average change in account balance from 1999-2001 was -7.9% for those aged 50 to 59, and -14.3% for those 60-69. The numbers have probably worsened since then, given market conditions subsequent to 2001.

This literal change in fortunes has taken its toll in a number of ways. According to the Federal Reserve Board, for instance, debt among older Americans has risen substantially since the early 1990s, and the 55- to 64-year-old age group is now carrying more debt than any other age segment. Also, the Consumer Bankruptcy Project reports that the number of 50+ individuals who have declared bankruptcy has risen from 180,000 in 1991 to more than 450,000 in 2002.

When it comes to the impact of the market downturn on the mindset of pre-retirees (not simply to their wallets), there is no more revealing statistic than this one from the AARP: In 1999, 67% of survey respondents believed they could retire by age 62; by 2002, the number was 25%. In any context, going from two out of three to one out of four is a dramatic and anxiety-producing change.

Not Much Guidance At Work

The general desire for guidance and reassurance that most investors feel today is made that much more urgent among pre-retirees by their losses and impending (or so they hoped) retirement. And they are not getting that guidance from their employers. A study by Empirical Research Partners found that only 25% of the nation's defined contribution plans offer advice, and just 16% of those plans with more than 5,000 employees. Furthermore, only 20% of eligible participants take advantage of that advice.

That helps explain why, when asked about the keys to a successful advisory relationship, 70.7% of affluent investors cited solutions to their current financial problems.

Clearly, there is a great opportunity for financial advisors to meet with their pre-retiree clients and strengthen the relationships. And, as we have consistently emphasized in this column, regular contact with affluent clients is a powerful business builder. Our survey of 123 affluent clients in late 2002 clearly illustrated the difference between regular contact and irregular contact when it comes to getting referrals.

The survey showed that when advisors were in regular contact, 64% of affluent clients gave referrals to them, 66% gave them more assets to manage, 82% accepted their recommendations, and none were planning to switch or had changed advisors in the previous year. When advisors weren't in regular contact, none of the affluent clients gave them referrals, only 1.4% gave them more assets to manage, 32.9% accepted their recommendations and 30% planned to switch advisors and 72.6% had changed advisors in the previous year.

Talking Points

When you meet with pre-retirees, every client is going to have different needs and concerns. You know the client best and can adjust your presentation accordingly, but here are some issues that should be top of mind: