The dramatic increases in people’s life spans over the last century were, at first, heralded as unmitigated good news. Yet the news has become worrying to those who need their lifetime income to stretch that much further. The news also means more stress for the aging children of elderly parents, for pension funds and for governments. And the solutions adequate to the challenges of increased longevity are by no means fully integrated into our nation’s policies.
To an unprecedented degree around the globe, people are approaching what we used to call “the retirement years” with mortgages, with aging and often unprepared parents and with dependent or partially dependent children.
Longer lives must now be an important part of the calculus when we’re figuring out our clients’ financial solutions. (See Figure 1.) These new calculations will greatly affect how clients invest and spend money—their financial capital—in retirement. The anticipation of increased longevity will also change how clients view the long arc of their working years. This phenomenon has even prompted structural changes at our own firm. Our clients’ changing needs mean we must offer new services—which, as it turns out, are a bit of an operational handful.
We have seen the “Age of Longevity” paradigm unfold for more than a decade and have been asking what we can do to help our clients address it. In parallel, we’ve recognized that our firm needs to grow to contend with our clients’ changing needs. The processes we are setting in motion are still relatively new—some are still in the conceiving and planning stages. One strong area of focus is on creating a model for family support services, and creating the internal capabilities to oversee this new responsibility.
The Questions Proliferate
We’ve had to ask questions to give ourselves a good starting point for change:
• What is different in an “Age of Longevity”? What needs to be understood by clients and firms?
• What additional services should be provided or coordinated by an RIA firm? Why should this fall to a financial services firm instead of another type of professional advisor?
• What holds “holistic” firms back from trying to reach a different level of service? “Comprehensive” planning frequently includes financial, estate, tax and investment planning with varying levels of implementation and oversight. But it does not necessarily include planning or oversight in other aspects of clients’ lives, such as health care and social services. Could it be that “comprehensive” is no longer the accurate descriptor?
• How can a financial advisory firm transition to this new world with a new, targeted service level that responds to changing demands?
Today’s clients, facing longer lives, require a financially and emotionally literate advisor who values and fosters deep relationships. They will require ongoing trust. Advisors must be able to constantly evaluate and monitor clients’ objectives to see how they’re being met. And they must offer a much broader and deeper range of services that allow clients choices about their finances and spending wherever possible. And they must be able to cooperate with other generations of the families.
Many life planning services, however, are not in the wheelhouse of RIAs, even though their boomer clients might need them.
Longevity: History and Probabilities
How did longevity “sneak up” on us as investors, government policy makers and business leaders?
Part of the answer is the economic equivalent to the tragedy of the commons: The problem for everyone becomes the problem of no one. But recent history is also to blame, because people’s increasing longevity was obscured by the terrible violence and upheaval of the 20th century.
These statistics, welcome as they are for human happiness and achievement, are simply overwhelming for systems of thought that take decades to adjust.
While the three most recent periods in Figure 2 reflect U.S. statistics, this data mirrors the entire developed world—and is even directionally correct for much of the developing world. These gains have been attained, of course, primarily because the childhood death rate has declined with improved sanitation and medical care.
But thinking of mortality as an average conceals large distributions of possibilities. What’s required are a number of adjustments for “average” life expectancies to become more useful for personal decision making:
• Life expectancy is almost always stated as a median figure.
• Personal expectations should be adjusted upward for education (more is better), marital status (married is better), and income level (more is better, at least to a degree sufficient for the best medical care). The reverse is true for chronic disease (obviously not so good), and family history (usually not so good, but not typically a sole determinant).
• Most often, we think of joint life expectancy for a married couple. The interaction of two lives leads to an even longer longevity expectation after age 65.
Crafting Solutions
Clearly, many RIAs are looking to millennials for future growth. (We also create services for millennials as part of our strategic planning.) But we also believe that it’s necessary to improve services for aging boomers—and that their longevity issues may actually drive RIAs’ business success.
Longevity does not necessarily equal “aging,” though the two are often conflated. Longevity can best be viewed through the multiple lenses of physical, mental and financial health. It’s really about the reinvention of long life.
Here’s where it gets tricky for RIAs. Many client needs at this point are non-financial in nature—and the solutions often demand expertise that has relatively little overlap with the financial and analytical training of the typical financial services associate. Along with the pressing problems of aging and the unwinding of assets that increasingly take center stage at financial services firms, it’s the non-financial problems, the “softer” concerns like health care, that they will have to address.
Another key longevity problem, not broadly discussed, is that inheritances will be delayed as well. Even if older clients pass down large inheritances (after spending more in retirement) they may be transfering this money to impatiently waiting 60- and 70-year-olds rather than to family-forming 30- and 40-year-olds. (This will change succession planning at RIAs as well: The older generation has no plans to leave, and the up-and-coming associates are chafing—wondering whether and when there will be room at the top for them.)
Advisors who want to remain relevant for a long time will dedicate their efforts and resources to building and supporting a sustainable enterprise.
At our firm, we’re building out processes and adding capabilities in these key areas:
Discovery—and Decision-Making
To better apprehend our clients’ needs in the Age of Longevity, we’ve been engaged in formal studies with Jeff Belkora, a faculty member at the University of California, San Francisco School of Medicine, who has a Ph.D. in management science and engineering from Stanford University. His research career has focused on enhancing consumer engagement programs—particularly in the field of medicine. Working with Jeff, we’ve found that there are strong parallels between people with illnesses weighing the risks and benefits of medical treatment options and wealth management clients weighing their financial futures. In both cases, professionals have to hear a complete account of what the person faces.
Working with Jeff, we have begun using a client question and discovery process called “SLCT” (a health-care interview protocol that stands for “scribing, laddering, checking, triaging.”) The idea is to capture clients’ deeper, non-financial needs and aspirations—and to do so through a format that is usable by service team members. The process allows for quality control in the regions where we do business, and the results thus far have been very encouraging.
We’re optimistic that a tremendous side benefit of this process will be to see how it engages all team members early on—both to gain additional points of view and to help anchor the firm’s philosophy in all future interactions with clients.
Technology and Network Management
One of our key challenges in the Age of Longevity is (merely!) logistical: managing a network of professionals who can attend to the growing number of non-financial client needs. Such networks typically involve social workers, medical workers and other social services professionals. These are roles and responsibilities, in other words, that Halbert Hargrove personnel are not trained for and, typically, shouldn’t be performing.
We’re working on solutions to deliver these services, including case management, by using technology that helps us coordinate the work of professionals both inside and outside the firm. Technology links portals, which integrate decision making and service delivery, and make this all work in harmony. The goal is a user-friendly portal that securely aggregates data, shares information, serves as a gatekeeper for access and complies with HIPAA privacy regulations for electronic medical records.
Many questions remain. Who gets access? The client’s accountant? Kids? The questions are not trivial, particularly if your intention is to not lose money in the process.
Investing for Longevity
We think we’re really good at helping our clients plan for, invest and continually reassess where they stand as they move through their (potentially) longer lives. Here are several important areas of focus:
Measuring progress in relation to goals. This is accomplished through an intuitive process that accounts for asset positions, other cash flows and required/desired spending. Our measurement tools help indicate clients’ ability to distribute funds to family or charity earlier than they initially thought possible. For this, we have adopted a tool widely used in the defined benefit world: the funded ratio. Unlike a more simplistic focus on the asset side of the ledger, the funded ratio looks also at the client’s liability and spending side of the equation. Assets—or, as we prefer, “resources”—include incoming future cash flows, while liabilities (or “claims”) include both actual liabilities and obligations that may be willingly assumed, such as education costs and the cost of care for relatives.
Carefully tracking liabilities to clearly determine each client’s funded ratio. We think of it as adapting to life circumstances. For those who are relatively “close to the line” in funded ratio terms, we use “decumulation” (distribution) management. This adjusts asset allocation to optimize cash flows and deal with longevity risk while retaining the maximum flexibility for the client. In other words, depending on how the markets perform, and how the clients’ family circumstances evolve, they can still have options.
Having a backup plan. This is for unanticipated spending needs or market declines that drive a client’s funded ratio to “1” or below. This is what we call the “annuity floor”: Clients can hedge their longevity risk by purchasing that product. Although this kind of move is not inflation protected, it’s better than having the bottom fall out of the future.
Investing in ourselves. Finally, we’re focusing on furthering our firm’s sustainability so that we can continue to provide multi-generational client stability. Our firm is growing from within, among other ways by providing education, mentoring, ownership and leadership opportunities to motivated associates.
Thanks to the Age of Longevity, our present leadership can still contribute to the firm’s wisdom capital decades from now. But we’re enormously proud of and focused on our up-and-coming generation of management—and we’re happily engaged in the process of passing the keys of the executive and ownership suites to them.