As a whole, financial advisors agree that one of the most critical needs for clients during retirement is to generate an income stream the client cannot outlive.
Just don’t ask them to close ranks on how to get there.
The diversity of approaches to managing retirement assets are as varied as the number of retirement income clients advisors serve. When it comes to advisors nailing down best practices, “fuggedaboutit,” as the saying goes.
Tenets of retirement income – the 4 percent rule, the percentage of preretirement income needed for retirement, portfolio diversity, metrics such as total return – often fall by the wayside when it comes to how best to provide retirement income, said consultant Howard Schneider.
Nor is there any indication that advisors have any intention of changing the plethora of approaches they follow, he said.
“There has been virtually no shift in the philosophies advisors use to manage portfolios or greater agreement on the best solutions to use for these investors,” said Schneider, author of a report on advisors and retirement income support published this month.
The report, titled “Advisors and the Delivery of Retirement Income Support 2016,” is based on data from over 600 financial advisors gathered through an online survey conducted this summer.
Support for retirement income remains a core activity for advisors, said Dennis Gallant, co-author of the report and president of GDC Research. But many don’t offer specialized expertise in critical pieces that influence retirement income: Social Security, health care expenditures, or cognitive aging issues, for instance.
The majority of advisors – 81 percent – prefer a more generalist bent to positioning their practices, the report found.
Diversity Stands to Reason
In one sense, it’s normal for advisors to display a diversity of retirement income approaches tailored to the individual circumstances of clients.
The income needs of a single father are likely to vary widely from those of a married couple with inherited assets, for example.
A 65-year-old client with a huge growth stock portfolio demands a different approach from the 65-year-old client with the equivalent in a fixed-annuity portfolio.
One client may need help with budgeting health care expenses after a lifetime of profligate spending, while another may find himself preparing for around-the-world cruises after 40 years on a government salary.
Yet the contrast with the accumulation phase of life, where advisors are likely to recommend that a 24-year-old college graduate invest in an aggressive growth fund, could not be more different. The 40- or 50-year accumulation phase is easy.
The 20- or 30-year decumulation phase is far more difficult. During that phase, retirees ask their investments to sustain them and bear the brunt of a lifetime's worth of good and bad decisions.
Retirement income strategies are inherently customizable and avoid the cookie-cutter approaches, which is good for advisors because that’s precisely the value they bring to their clients, according to Schneider.
Advisors Suffer from a Paradox
So forgive advisors who suffer from what Schneider calls the “paradox of retirement income delivery.”
While most advisors say they are not making changes to the way they manage retirement income assets, many also admit to facing challenges in managing portfolios, differentiating their practice and engaging clients.
Advisors are open to changing their approach to retirement income to address investment strategies and clients concerns, Schneider’s research revealed. But they “lack consensus and confidence” to execute the most effective ways to provide for and deliver retirement income.
Even in the face of the most significant regulatory change governing retirement assets in more than 40 years, other than moving to fee-based and lower-cost products, advisors “don’t anticipate making any material support changes related to the DOL Fiduciary Rule,” the report said.
When it comes to using variable annuities, a product designed to guarantee an income stream, there’s little or no indication of a rebound in usage or that advisors intend to use them more frequently than in the recent past, the report found.
Low interest rates, narrower benefits and new fiduciary regulations have raised the bar on the VA sales. The Department of Labor fiduciary rule requires hefty disclosures, a signed contract with investors and limits compensation to a vague "reasonable" standard.
The SEC is expected to release its own fiduciary standard at some point.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]
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