Investment News

June 6, 2005

 

Boomers, advisers unprepared for retirement tidal wave

By Mark Elzweig and Nancy Miller

The tidal wave known as the baby boomer generation is surging toward retirement, which is no surprise. And yet the implications of this phenomenon - 75 million aging boomers leaving the full-time work force over the next 20 to 25 years - appear to be catching even financial advisers off guard.

``Most advisers haven't been prepared to deal with this,'' said Westley V. Thompson, president and chief executive of Philadelphia-based Lincoln Financial Distributors Inc. ``In a way, it snuck up on them. It snuck up on us as a nation.''

He says this non-surprise surprise reflects the youth-oriented culture of those born between 1946 and 1964. ``There aren't any boomers who want to get old,'' Mr. Thompson said.

``The model of life and how long a life is and how much of that is spent retired has been at the center of the financial services engine,'' noted Ken Dychtwald, author of New York-based Merrill Lynch & Co. Inc.'s ``New Retirement Survey,'' an examination of 2,348 baby boomers and their views on retirement. ``All of that is changing.''

Yet those assumptions aren't going away, even in the face of new data showing just how dated they are.

Assumption: Retirement begins at 62. Wrong.

Assumption: The so-called golden years will be spent on the links or at other leisure activities. Wrong.

Assumption: The accumulation years peak before your 50s. Wrong.

New realities

Yet everyone - even financial firms and the media - clings to those assumptions, Mr. Dychtwald said. The new realities point to boomers' living well into their 80s and 90s, and enjoying (or suffering through) 20 to 25 years of an entirely new model of retirement. That's a sea change from the mere 1.2 years post-retirement, on average, in 1900 and half again to nearly double the 13.6-year average retirement period in 1980, says John Nersesian, a managing director with Nuveen Investments LLC of Chicago.

The intensity of the boomer needs is just now beginning to drive financial firms and advisers to develop not just new products but a new approach to financial advice itself. Firms are waking up to a need to revisit basic assumptions about risk tolerance for the saving and investing years, as well as the riptides of post-retirement planning.

The realization has translated into a series of new studies from the likes of Merrill Lynch, Nuveen and Financial Research Corp. of Boston. Earlier this spring, the Money Management Institute in Washington, the voice of managed money, sponsored a conference devoted to retirement issues rather than merely fee-based products. Even more unusual within the industry, Lincoln Financial Group last year launched an independent study group devoted to issues relevant to boomers.

And yet many firms remain remarkably complacent. Chris Brown, director of retirement services research at FRC, recently completed a survey of 18 financial services firms that also featured lengthy interviews with 20 others. The biggest surprise: Not a single participating firm had created a think tank on retirement.

``We felt pretty strongly that would help to lead to original thinking in terms of products,'' Mr. Brown said. For the moment, most firms have launched cross-company task forces that command varying degrees of authority, he said.

A breed apart

Everyone does seem to be arriving at the same conclusions, no matter how much or how little they explore the issue: Baby boomers are a breed apart. Not only are members of this generation likely to enjoy a longer life, but they want to remain vital to the end.

One of the key findings in the Merrill Lynch survey: The vast majority of boomers don't plan on retiring for good. Mr. Dychtwald explains that boomers do not view retirement as a period of retreat and withdrawal but as a time of new beginnings. They will cycle through periods of leisure and work rather than seeking a life of full-time leisure. That fundamentally affects cash needs in retirement years and asset accumulation strategies now.

The extended lifespan and spendthrift habits of the baby boomer throws into disarray some basic regulatory assumptions about prudence and suitability. When they hit their 50s, ``boomers are sprinting to accumulate assets,'' observed Lincoln Financial's Mr. Thompson.

In their 30s and 40s, they focused on buying homes, paying for college and then for nursing care for their elderly parents. Suddenly, asset accumulation is critical in their 50s.

An October 2004 survey by Lincoln Financial Group revealed that 25% to 50% of retirement assets were accumulated in the 10 years prior to retirement - that is, when respondents were in their 50s. Sixty-five percent of respondents ``significantly'' increased savings in the last 10 years of savings, the survey of a random group of investors showed. This need to accumulate assets rapidly precludes a switch to fixed-income instruments, the standard recommendation for that age group.

As a result, the sun may be setting on age-based assumptions. Mr. Dychtwald observed that there is no typical 50-year-old. They could be college educated with a million dollars in the bank and grown kids or they could be marrying for the first time and have a heart condition or be training for a marathon. The permutations are endless. Mr. Dychtwald challenges firms to move away from salesmanship and toward problem solving.

``The financial industry has been product-centric,'' he said. Wall Street is home to product wizards - bond specialists, stock jockeys, insurance nerds and so forth. According to Mr. Dychtwald, now is the time for ``consumer-centric'' solutions. Savvy maturing men and women will be seeking financial advisers who can help them envision their dreams and then put the financial elements in place to fund them, he said.

Mr. Thompson, the Lincoln executive, concurs that financial advisers need to go through intensive retraining. ``Very few have baseline understanding across multiple solutions,'' he said, calling for a ``significant holistic approach to advice.''

For financial advisers, that means working in teams to share expertise and develop comprehensive plans that take into account longevity, and health-care and lifestyle issues.

Profitability issues

And then there are issues of profitability for financial firms. FRC's Mr. Brown noted that firms are starting to move away from age-based marketing in favor of wealth-based management. That's fine when it comes to well-to-do clients with portfolios that guarantee income streams to advisers throughout the investor's lifetime. But Mr. Brown wonders how firms will protect profitability with regard to middle-class clients who will in fact substantially draw down their savings over the course of their retirement years.

``Twenty-five percent of firms hadn't even contemplated the issue of declining balances,'' he said.

If Wall Street is coming up short on post-retirement planning, no wonder investors are coming up woefully short as well. Nuveen's Mr. Nersesian noted that the firm's own survey of adults between 55 and 65 showed that only 29% of those queried had laid out any post-retirement planning. Sixty-six percent felt that they had underestimated their post-retirement needs.

That lack of planning may be a vestige of the three-legged stool of retirement on which previous generations depended: defined employee benefit plans, Social Security and personal savings.

Defined benefit plans have been supplanted by the self-directed and largely self-funded defined contribution plans, which surged from 159,000 in 1985 to 628,000 in 2004. And of course, few pre-retirees today would venture to bet their future on Social Security.

``Retirement planning is more complex and more uncertain,'' Mr. Nersesian said. ``How much money can I withdraw? What kind of lifestyle will I have?'' Those are the questions many retirees are unprepared to answer.

Consistent returns

In post-retirement planning, Mr. Nersesian said, investors need to focus on consistency of returns. ``As investors, we often look at the average rate of return. We assume 12% is better than 10%.'' But that is not necessarily the case.

To demonstrate this, Nuveen constructed two models of returns, both with identical rates of return on an average annualized basis. The first model assumed positive returns in the early years of retirement, and then negative returns. Then it reversed the order of returns, going from negative to positive. The retiree who ended life with negative returns fared much more poorly than the other.

``The crucial message is, it's not just the average return but the consistency of returns and the way in which those returns are produced,'' Mr. Nersesian said.

Communicating with baby boomers represents a whole new frontier as well. Mr. Dychtwald notes that boomers don't trust the experts and are not particularly loyal, a striking contrast to previous generations, which relied on government and employers to provide for retirement. That lack of trust in authority is so pervasive that the Merrill Lynch study revealed that 70% of boomers did not work with financial advisers. A recent cross-generation survey of investors by Eaton Vance Corp. of Boston found that about half invest directly and half use advisers.

Demand for financial advice figures to increase, but top producers can't assume that they will be the big beneficiaries. Today's ``corner-office adviser'' caters largely to older, affluent individuals.

``If you are really good at 65-year-olds today and think you can use the same suit and same techniques with boomers, you are in for a big surprise,'' Mr. Dychtwald said.

And this gets to the heart of the relationship between advisers and investors. The opportunities for advisers are phenomenal, if not unprecedented. The risks are great. Advisers could drown in the surge of demand for more-complex advice. Investors run the risk of coming up high and dry in the twilight of their lives.

With planning, education and hard work, advisers and investors can ride this new wave of uncertainty with greater confidence and success.

Mark Elzweig is president of Mark Elzweig Co. Ltd., a money management executive search firm based in New York. Nancy Miller is director of client services.