A Chicago-based financial advisor, James Brewer, follows Moshe Milevsky for objective information on potential investment products for his client.“I believe that Moshe does not do his research based upon making advisors and vendors comfortable,” Brewer says. “His academic approach provides me confidence that the investment information is obtained for economic self-interest and not promotion.”
Brewer is among an increasing number of advisors who are in need of access to more unbiased and objective information about products and investments they recommend to their clients, according to a new study, “Advisors and Retirement Income Support– 2016,” produced by the firms GDC Research and Practical Perspectives. “Advisors don’t feel they have enough objective information on their investments and products, which tend to be extremely complex,” says Howard Schneider, president of Practical Perspectives. “They believe they are not getting the full story on some of these solutions or they are not getting the information they need to understand how these products will perform in the market.”
The bigger problem is that there is no single holistic tool or capability that financial advisors are using to deliver retirement income, according to the study. As a result, retirement planning is lacking a formalized approach.
“There has been virtually no shift in the philosophies advisors use to manage portfolios or greater agreement on the best solutions to use for these investors since our last study in 2008,” Schneider says.
Some 45% of advisors use a total return methodology for generating cash flow for retirement clients. These advisors are not focused on income as an outcome for managing portfolios but instead work to generate an optimal total return consistent with the client’s risk parameters. They then draw down the portfolio as needed and appropriate to satisfy client income needs. But advisors like Brewer dislike the focus on portfolio management of most financial planning programs. Instead, they prefer a more integrated approach to generating income.
“An integrated approach adds insurance guarantees and the potential upside of investing in equities,” Brewer says. “The asset allocation decision should at least consider the client choosing a fixed annuity with a cost-of-living adjustment or whether they want to live off of withdrawals in an effort to pass on their assets.”
The study further found that only one in seven advisors position themselves to serve retirement clients. Most advisors take a generalist approach. But even these financial advisors who specialize in retirement planning are not going as deep as they could in the process. “They are not providing a broad enough focus on specific topics such as Social Security or health care,” Schneider says. “There’s still more opportunity for advisors to work with their clients more deeply on these issues.”
The help desk of their broker-dealer’s home office and Morningstar’s analysis of various mutual funds and annuities contribute some assistance, but it’s not enough. “Advisors need more help bringing the information together to present to their clients,” Schneider says. “They are looking for a more consultative approach.”
Currently, advisors are cobbling together a hodgepodge of tools and processes to create retirement plans for their clients, according to the 85 page report. “They are using multiple planning tools, optimization calculators, Monte Carlo simulations and Excel spreadsheets to deliver retirement income support for clients,” says Dennis Gallant, president of GDC Research in Sherborn, Mass. “That makes it hard to build a consensus when advisors are using such an unbundled approach that varies from client to client.”
The challenges in engaging with retirement income clients include managing client fears and anxieties, helping educate clients on realistic expectations for living in retirement, and preventing client behaviors that can undermine retirement plans. “It would be helpful if their broker-dealers and custodians provided more education and presentations on topics like what life is like in retirement, getting spouses on the same page and how the market is changing and will impact retirement clients,” Schneider says.