Event shows how to transform your practice to meet retiring boomers' needs.
Baby boomers may have nearly $11 trillion in assets
to invest, but that doesn't mean they won't shake up advisors practices
with their unique melange of challenges, too. About 1,250 advisors
heard firsthand about these challenges and opportunities at the 2nd
Annual Financial Advisor Symposium in Las Vegas April 27-30.
The conference began with a keynote address by Rob Arnott, editor of the Financial Analysts Journal and manager of the Pimco All Asset and All Asset All Authority funds, on the subject of investing for retirement in a low return era. At the start, Arnott's talk was sobering. He argued that no major markets are "priced to deliver the 5% or higher real rates of return we all seek."
Arnott indicated earnings quality remains much lower than most investors believe, that valuations are still high by historical standards, that the equity risk premium still is close to zero and that demographics may well require lower future returns. He believes that the U.S. stock market is probably "in the early stages of a secular bear market," though he acknowledged he could be wrong.
But the biggest risk factor, in his view, could well be demographics. Longer life expectancies will place unprecedented strains on the economic system that will impact much more than Social Security and Medicare. According to Arnott's calculations, the optimal retirement should rise to 71 by 2020.
After 30 minutes of gloom, however, he turned to the spectrum of returns across all asset classes and showed that during the bear/sideways market from 2001 to 2005, emerging market stocks returned 143%, while commodities and TIPs returned 87%, and REITs returned 86%. Other asset classes, including most fixed-income securities, performed well. The message: Rarely has diversification been more important.
While fighting for boomers' rollover retirement assets is becoming a clarion call for the financial services industry as a whole, the reality is that boomers' retirement withdrawals are already taking a significant bite out of the assets advisors manage. And that means boomers are also taking a bite out of the fees advisors charge to manage those assets. The larger your retiree client base is, the more frightening the pressure on profit margins may be, especially for smaller or less veteran shops.
"We have a couple of million in assets flow out the door every month," Greg Sullivan, president of Sullivan, Bruyette, Speros & Blayney, told attendees. "So from a business perspective, we have to bring in another $25 million in assets under management every year just to break even. And don't forget, we try to grow by 20% each year, too." said Sullivan, whose firm manages $1.6 billion. He remains CEO of the McLean, Va., firm he helped found, although it was acquired by Harris Bank three years ago.
"As assets go out the door, how do you maintain your own income?" asked Kenneth Ziesenheim, managing director of Thornburg Investment Management, who moderated the "Transforming Your Practice to Retirement Income Management Business" panel.
About a third of Sullivan's clients are currently in retirement or preretirement. As that client base ages, it will become increasingly important to bring in new assets, he said. At the same time, a growing number of advisors are working on a new pricing model to insulate their practices from declining assets and markets. "Last year we increased our fees and did a new client agreement," Sullivan said. "We only lost two out of 800 clients. People didn't like it necessarily, but the key is retaining clients." The smallest client portfolio Sullivan's firm will manage is $1 million, and it charges a $10,000 minimum fee to do it. "I wish we could handle everyone, but we have to be able to deliver a high level of service to the clients we have."
One justification for a price hike, beyond the prospect of shrinking assets? Clients moving into retirement simply demand more time from their advisors. "When my clients retire, I get a new best friend," said Judy Shine, who spoke on the "Big Retirement Investing Challenge" panel. Shine, who manages just under $400 million, said she has not yet decided to charge clients more, but has thought about what an onslaught of retirees will mean to her firm's bottom line. "If over five years, an 8% growth rate goes to 6%, you're going to see slower growth for firms, particularly mature practices." As a result, a number of planners are toying with the notion of adding a planning fee on top of their asset management fee, to offset their time and, in some cases, their static or shrinking asset base.
"We definitely know we have to address fees," said Christopher Guanciale, Senior Vice President, Business Development, PlanMember Services Corp. "Assets will be dwindling and we know we'll have to put together a model that is simple to explain."
Whether you see boomer retirement as a godsend or not, it's easy to understand that the surge in retirees is already beginning to create a sea change in the way advisors manage their practices. "I have been doing this since I was 26 and no one was in retirement. Now 40% of my clients are retired," said Shine. That creates the need for hard and fast changes in the way advisors manage money. A growing number of their clients have moved from the accumulation stage to the withdrawal stage. As a result, advisors are charged with the heady responsibility of ensuring investors don't run out of money before they take their last breath.
Longevity planning will become crucial. "If you are planning for a couple who retires at age 62, there is a one in four chance that one will live until age 98," Jerry Porter, vice president of the Fidelity Registered Investment Advisor Group, told symposium attendees. "This is a personal observation, but I hope a lot of your clients have incredibly complex situations at retirement," Porter said.
The more advisors can help retiring boomers solve their so-called complexities, the "stickier" their relationship with their advisors will be and the greater the chance that they'll win "held away" assets, such as IRAs, 401(k)s or brokerage accounts, Porter said.
So what do you do with those assets once you win them? That was one of the most pondered questions at the symposium. The lack of guarantees in the stock market and diminished yields in the bond market are making retirement investing a little dicey, especially for clients who have assets that just marginally support their cash flow needs.
While bond rates have certainly risen in the past two years, they are still hovering around money market rates (4.75%), which makes going long in the bond market an out-and-out gamble that will not allow investors to outpace inflation. The Federal Reserve on Wednesday raised a key interest rate to the highest level in more than five years but signaled that it may pause to assess the impact of its string of rate hikes.
Bond experts who spoke at the symposium, however, predicted that the bond market is poised for a significant rebound, predicated on those the market has experienced historically. "I think we'll begin to see rallies of historical proportions," said Todd A. Abraham, vice president and co-head of government/mortgage-backed fixed-income groups at Federated Investors.
That said, which part of the bond market will rebound remains to be seen. Some corporate bonds will certainly be dicey. What is clear is that the global desire for Treasuries is extremely strong from both Europe and Asia, said Jay Chitnis, chief investment officer at YieldQuest Advisors. The ten-year note's yield stayed at 5.12% and the two-year note's yield rose three basis points to 4.98% after the Fed's May increase.
Those looking for an alternative to bonds can find one in a new group of mutual funds which offer hedge fund management without the investor limits and illiquidity. Lee Schultheis, CEO and chief investment strategist for AIP Funds, was one of the first out of the box three years ago with the Alpha Hedged Strategies Fund. He packages the portfolios of 11 different hedge fund managers whose expertise is shorting U.S. stock into a single mutual fund.
"What we've done is put together 11 managers into a vehicle for advisors that gives them an open-end fund with daily liquidity," said Schultheis, who looks for hedge fund managers with smaller portfolios who can add value to the fund. The fund has outperformed the Lehman Brothers Government/Corporation Bond Index as well as the Hedge Fund Research Performance Indices by as much as 6% over the past three years.
Two more hedge fund managers are in due diligence and Schultheis expects to have 15 managers on board in the fund by year-end. "The key things we look for in managers are good fundamental strategies, good infrastructure and managers who don't have billions. The guys with $50 million can manage a lot better. The key thing is once we hire them, their portfolios have to have 100% transparency. We get to see every trade," said Schultheis, who spoke on the "Hedging Retirement Through Alternative Investments" panel at the symposium.
"What I hear most from the advisors who invest with us is they use this as an alternative because they're worried about low nominal yields in fixed income," Schultheis said. "When fixed income was 4% to 5% and money markets were paying 1%, advisors could still add value in clients' eyes. Now that the returns are so similar, clients are saying, 'I can put my money in a CD.'"
Adding value will be critical going forward, despite the nearly $11 trillion boomer retirees will have to invest. While currently there are 19,000 registered investment advisors who control $2.1 trillion in wealth, wirehouses are being very aggressive about seeking out boomer dollars and banks are hot on their heels, Thornburg's Ziesenheim told attendees. "Everyone is after the same dollars," he said. "We now the trend is toward independent advice, but wirehouses still control more than 50% of the money."