By Jim Livingston
During the past 12 months, advisors have been in disaster recovery mode. Most of their time has been devoted to repairing clients' portfolios and managing their emotions, while also trying to recover diminishing revenues so they can rebuild their practices. And in the midst of this turmoil, many advisors may have lost sight of the issue that has always been the focal point of their boomer clients' financial plans - retirement income.
Not only has the retirement income issue not gone away, it has been complicated and intensified by the on-going crisis. As the markets and overall economy begin to stabilize, now is the time for advisors to turn their focus back to retirement income planning, taking into consideration all of the new challenges that have recently come into the fold.
Retirement security has never been a sure thing for any generation, but the unique circumstances that exist today render traditional retirement solutions virtually obsolete. The traditional - and still most common - strategy for retirement income planning is to control for risk and provide growth by using asset allocation models with some form of equities, bonds and cash. The goal is to increase a client's asset base so there is more money to draw from as the client approaches and lives in retirement. While this strategy is commonly used among advisors, it is often flawed because it attempts to solve a complex problem with an overly simplistic solution.
The retirement income riddle is by nature far more difficult to solve than a mere accumulation puzzle. Investors are recognizing this fact and are seeking professional advice for improving their financial health, much in the same way they visit a doctor for personal diagnoses and ongoing medical care. Just as patients expect their physicians to be up to speed on all the latest treatments, investors expect their advisors to have a firm grasp on the products and strategies that can help address their retirement income needs.
However, it's important to note that knowledge alone is not enough - particularly if the advisor's expertise is limited to a narrow range of products and strategies. Solving for retirement income may require advisors to move outside of their traditional product comfort zone. It will certainly involve exploring a variety of solutions and finding new ways to incorporate them into a client's overall financial plan.
Advisors may also need to begin looking at their clients' investment objectives from a different perspective. For example, rather than assigning one risk tolerance to a client's entire portfolio, it may be more effective to create separate "buckets" for different pools of assets, each with its own risk tolerance. The strategy is based on the fact that most clients have multiple financial goals - their children's education, a family vacation, home improvements, etc. - in addition to their long-term retirement objective. Each of these goals and its associated asset pool has a different time horizon, and should therefore have its own investment strategy.
The advisor's broker/dealer relationship can play a key role in making these important transitions. It is critical to partner with a firm that offers a broad range of solutions, including a robust advisory platform. Firms should make it easy for their representatives to explore all available options, both in terms of products and business models. Training, education and consulting services are also essential to the advisor's ability to build effective solutions.
Finally, perhaps the greatest value an advisor can offer is the ability to translate product complexity for their clients. Income guarantees and living benefits are not necessarily simple, but they are potentially quite effective. It is up to the advisor to explain these features in as straightforward a manner as possible, which means they must be able to illustrate difficult concepts with clarity and confidence.
By exploring potential solutions, embracing complexity and adopting new ways of thinking about investor objectives, advisors can make real progress toward solving their clients' most significant retirement planning challenge.
Jim Livingston is president and CEO of INVEST Financial Corporation.