Boomers remain stubbornly optimistic, and this should guide the stance advisors take with clients.
The Spectrum Group estimated retirement assets lost $2.4 trillion last year, a drop of 25 percent. That change and others makes the results of a recent Northwestern Mutual study all the more interesting. Among the surveys' key findings: Only 19 percent of respondents expect their level of financial security to decline in 2009; Two in three (65 percent) believe they will eventually get where they want to be in life.
The optimism is remarkable considering only one in eight respondents feel financially secure and almost half (44 percent) feel unprepared for the future.
Clearly, many have made adjustments in their spending and savings habits. Yet financial security is a critical goal for most: in the Northwestern study a strong majority listed it as a top concern.
Most Americans are making inadequate changes. The 2009 Retirement Confidence Survey, conducted by my firm and the Employee Benefit Research Institute had an interesting indication of this. The percentage of people planning to work past age 65 only went up to 41 percent, a five percentage point gain from 36 percent last year. Not enough.
There is one more challenge. People and advisors have become more conservative in their asset allocation preferences. There are several theories about how long the impact of the economic downturn will last, but the weight of opinion is that it will continue for some time.
That means more weight will be placed on fixed income investments. Over the long term the return on these investments may be lower. Historically, equities have tended to outperform fixed income investments over the long-term. The implication of this is that many will have to save even more to have the financial security they so strongly desire.
What does this mean for financial advisors? First, it's important to use the optimism of your clients as a lever to get them to start investing with a long term approach. You should express your optimism also in the long range strength of the economy. Clearly, no one can time the market: it is impossible to know when the recovery will start and there is a chance of further declines. But this is a good time to get people to start dollar cost averaging. Use their optimism to reinforce more optimistic investing.
Second, it's more important than before for advisors to bring forward new solutions. If you have not raised the idea of annuities that provide guaranteed income for life to retired clients before, for example, now is a good time. Whether fixed or variable annuities, the key is that guaranteed lifetime income provides a secure retirement foundation.
Third, you have to be frank with your clients who aren't making the lifestyle adjustments they need. They must realize the value of their homes will not rescue them, they surely no longer expect double-digit increases in the value of equities. Lifestyle changes, working longer and more efficient investment strategies are the key.
Financial advisors will emerge from this period in a much stronger position. For the last several years your real competition has not been other advisors: it's been expensive vacations, luxury cars and other expenditures. More people realize the importance of saving and investing. It will be easier to attract more money from clients. Self-directed investors realize they need professional help. Good times are ahead. Be prepared.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.
