Advisors can gain an advantage—and help clients more—if they can assess the client’s attitudes about retiring before making a financial plan, according to two retirement experts who participated in a recent webinar.
The two strategists said the job for an advisor is to figure out how the client feels about probability, or risk, versus safety, and optionality, or flexibility, versus commitment. The answer to those questions will tell the advisor what retirement approach will appeal to a client, they said.
Wade Pfau, professor of retirement income at The American College of Financial Services, and Alex Murguia, CEO and co-founder with Pfau of Retirement Income Style Awareness (RISA), have developed a program to help identify the sweet spot for a client on the continuum of those four characteristics. They explored how to identify the retirement income style that can be converted into a plan that satisfies the retiree’s preferences during a webinar sponsored by the National Association for Fixed Annuities.
For instance, if a client or prospective client is comfortable betting his retirement on probability over safety, he will be comfortable assuming the stock market will grow to fund his retirement, Pfau said. On the opposite end of the spectrum, a client may want more safety and will feel more comfortable with bonds, annuities or other products that assure an income.
The second continuum stretches between flexibility, or optionality, versus commitment. Does the client want to set a retirement plan and not have to think about it again or does he want to have the option to make changes, Pfau asked.
How the client feels about these retirement styles can frame the conversation the advisor has with him, he said. The four concepts can be used to determine whether the client would be more comfortable thinking about the total income needed for retirement; whether he would prefer focusing on protection of assets, if he would prefer to think in funding segments of retirement time or if he wants to assume some risk and wrap it in a product that provides protection, Pfau said.
About one-third of people feel more comfortable concentrating on total returns and one-third want income protection, he said. The remaining third are divided between time segmentation and risk wrap.
“The person who values income protection is going to be more open to a conversation about fixed annuities. A total return person will want to talk about stocks,” Pfau said. “Higher income individuals and men lean more towards total return strategies and middle-income and women lean more towards income protection.”
Each of the choices represents a different way of thinking about the retirement plan. “All are viable,” Pfau said. For instance, one person may want stocks to cover essential expenses or may want stocks to pay for discretionary spending and another product to cover essential expenses.
“Let the client lead the way,” he said. “Not everyone needs an annuity.”