What will your firm look like in 2015? With about 75 million baby boomers retiring, different than than it does now
What do about 75 million Americans heading toward retirement sound
like? Like the most demanding stampede for investment and financial
planning advice the financial services business has ever heard.
How do you fully capture this opportunity to transform your business as
the investable assets of U.S. households doubles to more than $30
trillion in just the next decade? Some of the best and brightest minds
in the business are asking that very question.
For insight on how to create the most competitive and profitable
future-minded firm imaginable as the largest demographic shift in
history looms, we turned to Undiscovered Managers and JP Morgan Funds,
which provided us with an exclusive first look at their five-year
update to the controversial study, The Future of the Advisory Business.
For a definitive lineup of the products and services baby boomers will
need and demand, we talked to leading analysts at Charles Schwab,
Fidelity and Tiburon Strategic Advisors.
To understand better how to position your firm to service boomers as
they move from accumulation to distribution, we interviewed executives
at LPL Financial Services, Walker Capital Management, Armstrong,
MacIntyre & Severns and 50-Plus Communications Consulting.
The goal is simple: To show you what the firms best-positioned to
capitalize on retiring boomers' need for investment advice will look
like, so you can infuse your strategic thinking and decision-making
with these facts now.
Currently, boomers account for fully one-third of all U.S. households.
About 46 million of the 75 million boomers, born between 1946 and 1964,
are expected to retire in the next ten years, doubling investable
household assets to more than $30 trillion. "This clearly represents
the single largest wealth redistribution event in history," says Joshua
Rymer, senior vice president at Schwab Institutional in San Francisco.
"Just the numbers and demographics alone mean significant opportunities
for the financial services industry to help."
The good news is that boomers need assistance and those who seek it,
especially wealthy boomers, who are skeptical or downright cynical
about Wall Street, are increasingly turning to independent advisors.
Traditional brokerages have lost 11% of their wealthy clients in the
past two years, and shrinking satisfaction ratings suggest the trend
will continue. More than ever, the affluent are turning to independent
advisors, with 65% reporting that they intentionally avoid brokers
affiliated with a large financial institution, according to Spectrem
Group in Chicago, which tracks the investment behavior of the wealthy.
And while we've all heard about do-it-yourself investors, by all
accounts it would appear that boomers desperately need retirement
income planning help. That's especially true if the recently retired
are any indication of how boomers themselves will manage wealth
post-retirement. More than 15% of those who retired between 1992 and
2002 have already depleted half of their retirement savings, and 20%
were on track to deplete it all before they die.
That's the startling finding of the Employee Benefit Research
Institute's latest study on new retirees. Research from Putnam
Investments found that one in five new retirees are struggling
financially and only 20% have a systematic withdrawal plan for their
assets, greatly increasing the likelihood that they will outlive their
wealth. When asked what their biggest regret was, 70% said they were
most sorry they had not saved more money. And 27% wished they were back
at their old job, rather than retired.
So while baby boomers will be ripe in terms of their need for
investment advice, you probably won't want all of them as clients. And
the rest of the financial world, spurred on by the success of the
advisor model, will be seeking those households who have larger sums to
invest right along with you. That's why it's important that you build
and position your firm now to serve boomers profitably. Here's how.
How Much You Manage Matters
The message of the new Undiscovered Managers study isn't so different
today than it was five years ago. If you want to compete and run a
highly profitable business, it's critical to have at least $100 million
in client assets under management and be growing. "That's the way we
see it, " says Sharon Weinberg, managing director of the institutional
advisory business at JP Morgan Funds in New York City, which acquired
Undiscovered Managers and was instrumental in producing the
soon-to-be-released second study.
As predicted five years ago, firms are shaking out into three
categories, Weinberg says. There is a small group of dominant
competitors with billions of dollars under management; a collection of
specialty advisory shops or niche competitors, which can still be very
profitable; and last, the thousands of small practices that are at best
marginally profitable.
Margin compression, the increasing cost of client acquisition and
rising compensation and regulatory costs will all make continued growth
an imperative, says Weinberg. "There are lots of way to be successful.
You can be an excellent wealth manager, a dominant geographic player or
a niche player, but life will more competitive and much tougher for the
smallest players." Smaller firms produce on average just $70,000 in
annual pre-tax income for their sole proprietors, prompting Weinberg to
wonder if these folks are taking a salary at all.
One prediction from the original 1999 Undiscovered Managers report that
has failed to materialize is that a wave of consolidation and roll-ups
would sweep the profession, creating lots of large entities. With the
exception of Jessica Bibliowicz's National Financial Partners, most
attempts to roll up advisory shops have proved to be false starts.
Most of the larger firms have managed to grow organically, while most
of the consolidation activity has occurred at the small-firm level.
There have been scattered mergers among larger firms, and a few
regional banks like Mellon and The Harris have purchased selected
advisory firms.
Are You Ready For Competition?
Few advisory firms have dedicated personnel or other resources to
marketing, and many have yet to suffer as a result. This doesn't mean
their marketing void won't eventually hurt them.
"Competitors are moving into the advisor space to capture boomer assets
pretty aggressively, so you have to put marketing muscle to work for
you," Weinberg says. "We hear a lot of lip service about marketing, but
only a few firms have hired marketing directors and are doing client
surveys and active referral programs."
Depending on your specialty and where your firm is located in the
country, you may not have gone toe-to-toe with other advisor types for
boomers or other clients yet, but the day is coming. "Right now, we see
close to 400,000 advisors out there. There just isn't a lot of room for
additional advisors," says Jeff Nagy, a research manager with Tiburon
Strategic Advisors in Tiburon, Calif. "If you do the math, you see that
400,000 advisors are targeting the same 40 million households that have
roughly $100,000 or more to invest, which leaves just 100 possible
clients per advisor."
Market Upstream Now
If you can make more money providing essentially the same types of
services to some clients rather than others, and a wave of potential
new clients like the boomers is heading your way, why not choose the
more profitable among them? It makes sense, since costs are increasing
almost across-the-board at advisory shops.
Compensation and compliance expenses, in particular, are soaring. "One
headhunter told us that the cost of experienced advisory employees
increased 40% in the past five years," Weinberg says.
Simply put: It's time to upgrade your client base or expect to hit a
wall in terms of capacity and profitability. One way to move upstream,
of course, is to create a program to clone your best clients by
actively asking them for referrals to business associates, friends and
family who are very much like them in terms of assets. "The next stage
in the evolution of this industry has to be focusing on client
acquisition," says Weinberg.
That means focusing on clients you like to work with, who you can grow
with and who are most profitable to the firm. Once you do that-identify
your niches-all of your communications and marketing efforts will flow
in a more effective and directed manner, says Michael P. Sullivan,
author of 101 Easy Ways to Increase Business with Boomer-Plus Clients
(www.graymoney.biz).
But some advisors who have conducted client surveys discovered that
clients have some surprising attitudes about referrals. Balasa Dinverno
Foltz used to send clients who referred prospects a gift as a token of
appreciation, Armand Dinverno says.
After a client survey revealed many clients felt uncomfortable about
accepting tokens, they stopped. That says a lot about how views on
conflicts of interest in the post-Enron era have filtered down to the
client level. But it also indicates that clients realize advisors'
value proposition is real. By providing referrals they think they are
doing the prospect, not the advisor, a favor.
If you wait until boomers actually start retiring to market to them
you'll miss the best clients, and worse, the opportunity to have them
roll over their 401(k)s and other retirement plans intact. When left to
their own devices, 70% of affluent boomers roll out of or are planning
to roll out of their retirement plans unadvised, according to a new
survey of boomers by Bain & Company, a Boston-based global business
consulting firm.
Rethink Your Investment Planning
"One of the trends we're already seeing is the movement to position
your practice to speak to the needs of those boomers moving from
accumulation to distribution," says Jonathon Eaton, senior vice
president of product marketing at LPL Financial Services, based jointly
in Boston and San Diego.
Helping clients decide which assets to tap first can be instrumental to
tax efficiency and extending the life of assets. Currently, firms such
as LPL and Schwab are working on the next generation of technology to
give advisors the tools they need to show clients all of their
retirement income options and how much income they can generate at
various risk levels, while also getting a clear sense of how long their
assets will last under various scenarios.
Simplicity will be key to the success of all boomer developments.
"Complexity in the way of products and services that are offered to
retirement audiences continues to have a stranglehold on financial
institutions that cater to affluent boomers," says Andrew Schwedel, a
financial services consultant at Bain in San Francisco.
Products that have already started to garner boomers' attention include
annuities, long-term care insurance policies and reverse mortgages.
Immediate fixed annuities, as a part of a boomer's overall retirement
portfolio, is starting to be viewed by some as an anchor-a way to
ensure retirees can pay fixed monthly costs and still leave part of
their portfolio invested in equities, seen as essential as life
expectancies increase.
Living benefits on annuities are providing boomers with more options
for generating income for themselves and heirs, Eaton adds. Legacy and
intergenerational planning will also become more crucial, since boomers
are the wealthiest generation the world has ever seen and see
themselves as change agents and activists, adds Sullivan.
Creating expertise in-house or in partnership with others in the areas
of insurance, alternative investments and real estate will help more
advisors become wealth managers, a goal that 90% say they aspire to but
only a few have become.
Expect To Be A Counselor
Of course, it's critical that boomers understand their risks-most
notably the risk of outliving their wealth. "I'm hearing more and more
from advisors who work with us that they have boomer clients who want
to retire early," says Marcia Mantell, a vice president of retirement
at Fidelity. "That can be tough because the answer isn't always yes.
It's up to the advisor to try to bring a holistic approach to the table
so that client goals and realities are factored in. Maybe the client
can work part time or work a few more years or both, if that's
necessary, but they need to hear that from the advisor."
What the client really needs to understand is how well all the pieces
of their retirement income and financial plan work together, says
Schwab's vice president of financial planning Rande Spiegelman. "It
will be the advisor's job to make sure that clients have money in
retirement, for the entire time they're retired, so they're able to
take income in a well-planned, well-thought-out manner.
"The well-equipped advisor is going to be able to discuss the
comprehensive needs of clients, beyond investment performance,"
Spiegelman adds. One way to figure out what clients need is to ask
them. Use surveys and annual meetings to ferret out what they need and
want. Many are already grappling with the issues related to caring for
aging parents, so they'll be good resources in terms of current and
coming needs.