Community Banker

September 1, 2005

 

The New Face of Retirement

by Gordon Matthews

Ron Flaiani, director of financial services at Northern California's Fremont Bank, has an attention-grabbing question for his 60-year-old customers who are planning to retire at 65.

"I ask them how often they get paid. If they say twice a month, I punch the numbers and tell them that they've only got 120 paychecks left before retirement. Then I ask them if they're ready. It's a scare tactic," Flaiani said. It's also a question Flaiani may be asking more and more often over the next few years.

On Jan. 1, 2006, the leading edge of the vast baby boom generation will begin turning 60 years old and heading down the final stretch toward retirement. If community banks haven't done so already, they should be stepping up planning to cope with the changes that the retirement of the nation's largest generation will mean for their business.

The bad news is that too many banks are behind the competition in gearing up to serve the special financial-management needs of baby boomers. But the good news for banks is that it's not too late. Relatively few boomers have done much financial planning for their retirement, and that gives bankers an opportunity to catch up-if they swing into action soon.

As a community institution, Fremont Bank is trying to move into the market of future retirees with $ 250,000 to $ 2 million to invest. The many people who are closer to the lower end of that scale are often overlooked, Flaiani said, because they're seen as small fries and "too transactional" as customers. "We're trying to put a face on those kinds of opportunities and build relationships," he said.

For banks with the right strategy, opportunities should abound. The baby boomer generation is huge. Approximately 77 million people were born in the United States between 1946 and 1964. All their lives, they've shaped events. During the 1950s and early 1960s, they sparked a wave of school construction. Later, they created a housing shortage. Business and culture have long bent to their sway; the boomers' aging and retirement years won't be different.

Make Way for the Biggest Generation

The number of Americans aged 65 and older will rise from around 35 million in 2000 to about 40 million in 2010, then jump to almost 54 million in 2020, and ultimately crest at more than 70 million by 2030. In short, the population of senior citizens is going to double in only 30 years. After the year 2011, more than 10,000 people are going to be turning 65 each day.

"There are going to be a lot of them. For a bank, especially a community bank, the thought needs to be that they ought to be coming to you for their planning and advice, instead of going elsewhere," said Ray Reese, a financial planner who has partnered with Belgrade State Bank in Belgrade, Mo., for nearly nine years.

Earlier this year, Southern Community Bank & Trust Co. in Winston-Salem, N.C., consolidated its brokerage and trust activities to form Southern Community Advisors as its comprehensive wealth management arm. "Our hope is that this one-stop approach will meet the needs of the big wealth transfers happening in the coming years," said F. Scott Bauer, Southern Community Financial Corp.'s chairman and chief executive officer.

"We have a much more focused effort now. This brings more to the table for our customers than did trust and brokerage as stand-alones. And it really helps in building our relationships with customers," Bauer said. "The goal is to cement relationships, build the assets under management, and create a long-term income stream for the bank."

Banks have long tended to regard themselves, first and foremost, as lending institutions whose main revenue source is net interest income. Other financial services have often been seen as somehow secondary. That attitude has been changing, but there have been distractions, such as the ongoing consolidation of the industry. As a result, some banks have found themselves running to catch up.

"The bigger banks have made the transition" to offering a broad range of financial services, Bauer said. "If the community banks are going to be longer-term players, then they are going to have to look for other ways to make income and have a more stable source of income."

Various surveys have found that boomers anticipate an active retirement--as long as they're healthy--and want it to unfold differently than it did for those who came before them. Their parents' goal of moving somewhere to play golf isn't necessarily one they share, and the porch-sitting of their grandparents isn't part of their mindset.

In fact, "retirement" and "senior citizen" aren't in the baby boomers' generational lexicon. That is something marketers of financial services will have to take into account. Instead, boomers intend to "live younger, longer" as part of a new life stage, according to a study done by Merrill Lynch with Harris Interactive and Ken Dychtwald/Age Wave.

Of course, this attitude won't necessarily impress Father Time, nor does it change the basic financial facts of life.

Many boomers, notably the older ones born between 1946 and 1954, began their working careers assuming--if they thought about it at all--that their retirement finances would be similar to those of their parents. That is, that the traditional "three-legged stool" retirement model--combining Social Security, personal savings, and company pensions--would apply to them as well.

Social Security will be there, despite the recent debates, but the boomers have been far better at spending than saving and, of course, the traditional "defined benefit" company pension plan is increasingly rare for workers outside the government or the military. The number of major private companies offering traditional pensions has dropped to the 50 percent range, down sharply from 62 percent in 1998, according to a Watson Wyatt Worldwide survey.

Strategies for Seizing the Business

These trends outlined above all point to one thing: The market for financial planning and asset management is about to explode. Indeed, the shift is already underway. It can be seen in the growth pattern of financial products such as reverse mortgages, which enable homeowners 62 or older to borrow against the equity in their homes without taking on new mortgage payments.

Financial Freedom Senior Funding Corp. of Irvine, Calif., the country's largest lender and servicer of reverse mortgages and an ACB Business Partner, has been tallying record volumes of activity almost monthly. In May, Financial Freedom announced it had signed a contract with actor James Garner to be spokesman for the company's array of reverse mortgage products.

One thing is certain: There will be winners and losers among the many providers of financial products and services. Community banks can be winners--if they adopt the right approach.

"We'll have the largest group of any generation retiring over the next 15 years. It's going to stretch the retirement system and provide huge business opportunities for the organizations that are ready for it," said Barry L. Dayley, senior vice president of Money Concepts International Inc., also an ACB Business Partner. Money Concepts, a broker/ dealer for a network of financial planners, has created a financial institution division to work with community banks to offer financial planning and asset-management services.

"A low percentage of people have done any real financial planning. They're not yet locked into any particular provider of these services. What's more, unlike the prior generation, their pensions are often 401(k) plans that are portable, and thus can be moved when the retiree finds the right relationship with a provider," Dayley said.

The competition among providers of financial products is both wide and deep, Dayley said, but community banks still have the special advantage of being closer to their customers than the competition.

"A bank has got to advise its clients. It can't just be a product seller," he said. "It can't just offer an annuity program and a mutual fund program. While a lot of these products are very good, they're almost a-dime-a-dozen. A bank needs a real advisory program for financial planning and asset management."

"Information and advice" is the No. 1 need among bank customers more than 45 years old, said Dayley, citing a study by MacroMonitor, a financial services survey database program operated by SRI Consulting Business Intelligence, formerly part of the Stanford Research Institute.

It's a daunting business challenge, Dayley said. "The customer will not only have to be satisfied, he or she will have to be completely satisfied," he added.

"The customer doesn't want to hear a rundown of products and then be urged to 'just put it all here.' What the customer really wants and needs is for somebody to say 'this is where you are, here's where you want to be at certain points in the future, and here's our strategy to get you there," Dayley said.

"It needs to be a solution-oriented approach, not a product-oriented approach. The products are secondary to the process of helping somebody achieve their objectives." "It's about relationships," said Reese at Belgrade Bank, who operates under the Money Concepts banner. "I've never tried to differentiate myself on the products from somebody across the street. The difference is in the service and the relationship. People want someone they can trust. I have clients who come in to visit and never talk about investments."

Others are moving as well. UVEST Financial Services of Charlotte, N.C., which opened in 1982 as one of the first third-party broker/dealers, now works with more than 280 institutions in 42 states, including community banks. UVEST, which is independently owned, started its asset management division in 1997 and has since added enhanced estate planning and trust services to its menu.

In Connecticut, bank-owned Infinex Financial Group was formed in 1999 to help smaller institutions offer expanded planning, investment, and insurance programs. It now works with 95 institutions, mostly with between $ 500 million and $ 650 million in assets. "The community banks are our core business. The aim is to place them on the same footing as Wall Street companies," said Stephen Amarante, Infinex's president and chief executive officer.

From its original base in New England, Infinex has expanded to New York, New Jersey, Pennsylvania, Florida, and Ohio, often under the sponsorship of state banking organizations. "We're currently in discussions with other state banking associations," Amarante said. "We're seeing more and more banks who are interested in this part of the business or in looking at it differently" because of changing customer needs they see ahead as boomers enter their sixties, he added.

The competition includes far more players than just other banks, of course. Big investment and insurance companies, savvy independent financial planners, and accounting and law firms are looking to gain a foothold or a larger segment of the potential market.

Firms, such as New York Life and Merrill Lynch, have studied the baby boomers' life styles and financial status for years as a way of gaining an edge. So have companies like Del Webb, the nation's largest builder of adult living communities. Understanding Baby Boomer Needs

What kind of bank customers are the baby boomers? Opinions differ about the economic health of this generation, encompassing nearly 30 percent of the population, and what lies in store for them. They're not easy to pin down.

Some studies have shown them to be generally wealthier, as well as healthier and better educated, than prior generations. At the same time, other studies have found that they accounted for half the surge in bankruptcy filings during the past 15 years.

Marketing experts are already fine-tuning their pitches toward various segments of the boomers. Those born earlier in the generational cycle, from 1946 to 1954, usually have more retirement assets than those born between 1954 and 1964, but they may be in more traditional and less portable form. Mortgage payments eat up 38 percent more of the younger boomers incomes than the national average, and they spend 10 percent less than average on insurance, according to a MetLife profile.

Boomers may also redefine retirement itself. For starters, age 65 is no longer the magic moment for retirement. "Retirement," in whole or in part, may occur on either side of that date. Many boomers say they're planning to work longer, partly because they are going to need to.

The financial impact of working in retirement "can change the entire equation," and could involve the pioneering of "new retirement models," according to studies by Merrill Lynch. It may mean some people won't need retirement savings as a primary source of income until later, which may bolster their ability to achieve financial goals through increased earning, saving, and investment-compounding years.

The likely scenario is a "mixed approach" customized for individual situations and adjusted periodically to reflect changes. That should further raise the premium on personalized service and counseling that takes account of unique aspects of the baby boomer generation. Many boomers find themselves with younger children and aging parents to care for. Many are couples, where both work and have careers. Few are enjoying the long-tenured job security of the prior generation.

Who should community banks target? Their own customers, to start with, said Bauer of Southern Community. Many of them still go elsewhere for most of the planning, management, and investment services they need, he said.

"Our first target is our existing customer base," he said. "We see a whole lot of opportunities there. We've already had some success in bringing them in, but we see it as a long-term program requiring a lot of patience. We're working to get the word out about what we can do. If you can maximize your own customer base, that's a win."