Study: key gaps advisors miss in retirement planning conversations

The Alliance for Lifetime Income has released the third chapter of its 2024 Protected Retirement Income and Planning (PRIP) annual study, which reveals significant gaps between financial professionals (FPs) and investors in retirement planning.

Key findings from the third chapter of the PRIP study highlight several critical gaps in how investors and financial professionals approach, communicate, and consider protected income and annuities in retirement planning conversations, specifically:

• Retirement Income Planning: When it comes to important facets of retirement income planning, there is a consistent gap of about 30% between what financial professionals say they discuss with clients and what the clients say they are hearing. For example:
  • • 98% of FPs say they discuss sources of protected income such as Social Security, pensions, and annuities, but only 69% of clients agree.
    • 96% of FPs say they discuss when clients should withdraw from certain accounts, but only 66% of clients say that is true.
    • 95% of FPs say they talk about how to minimize taxes, but only 64% of clients say that conversation occurs.
• Social Security Awareness: Financial professionals estimate that only 43% of their non-retired clients ages 45 and older are aware of their future Social Security benefits. And while 92% of FPs say they help clients decide when to claim Social Security, only 22% of clients say their FPs helped the most when they decided to start claiming. This finding highlights the need for improved communication on essential income sources, the survey said.
• Employer-Sponsored Retirement Plans (401K or 403B): While 81% of clients find annuities or protected income products within employer-sponsored retirement plans to be very or somewhat helpful, only 68% of financial professionals recognize this interest, highlighting a significant gap in understanding between investors and their advisors.

Reasons for the disconnect

The Alliance for Retirement Income research shows clear and concerning gaps between what investors need and want versus what many advisors are communicating when it comes to planning for retirement, said Cyrus Bamji, chief strategy & communications officer, Alliance for Lifetime Income. “There are a variety of reasons for these disconnects, including differences in expectations, psychology and behavior,” he added. “However, we believe that language and communication between clients and advisors is most likely the prime reason for some of these disconnects.”

Bamji pointed out that the most recent PRIP study, which simultaneously surveys and compares investor perceptions to those of advisors, shows that there is a consistent gap of about 30% between what advisors say they discuss with clients and what clients say they are hearing. For example, he pointed out that while 62% of advisors say they talk to clients about protected income, only 27% of investors agree that they do.

The language of finance is inherently complex, Bamji explained. A recent study of different industries showed that finance ranked #2 when it comes to the most confusing language and use of jargon, worse than the legal and healthcare industries.

No doubt, one reason for the complex terminology and language are regulatory requirements and what life insurers and advisors can and can’t say, he added. “But, when it comes to explaining retirement planning and annuities, it’s the use of disparate terms, definitions, and confusing jargon that has made these advisor-client disconnects worse,” he said. To clients, he added, complex annuities terms and descriptions might as well be in a foreign language.

Advisors do have to live within the guardrails of regulatory compliance, but that doesn’t mean they need to constantly change the way they explain or talk about products like annuities, Bamji pointed out “A few years ago,” he said, “we did extensive research on various annuity terms and definitions, and came up with simpler, easier to understand language that consumers told us they would prefer we use.”

Areas with the biggest “gaps”

There are plenty of areas showing disconnects, Bamji said. With 4.18 million people turning 65 this year, the peak of Peak 65, the disconnects between advisors and clients are no longer just data points – they have real consequences for the lives of millions of Americans entering retirement.

Bamji then shared a few examples of the biggest gaps they have seen in their research and discussions with consumers:

• Nearly 100% of investors believe protecting retirement assets is important, compared to just 79% of FPs. This underscores a big disconnect in priorities when planning for a secure retirement and how client-advisor conversations are perceived, he said.
• 70% of advisors say they frequently have conversations with clients about what they want to spend time doing in retirement, vs only 29% of investors.
• 96% of advisors say they talk to clients about which accounts to withdraw money from at which time, but only 66% of clients say they do.
• Almost 40% of clients say they’re extremely interested in owning annuities, while only 13% of advisors think they are.
• 95% of advisors say they talk about how to minimize taxes, but only 64% of clients say that conversation occurs.
• 90% of advisors say they talk with some of their clients about steps they could take if experiencing cognitive decline later in life; yet, only 27% of clients say their advisor brings up that topic.

Closing the gaps

So, what are some of the steps that advisors can take to craft client conversations that close some of these gaps and help their clients work toward a secure and fulfilling retirement?

Closing communication gaps between advisors and their clients is critical to building trust, improving client satisfaction, and making sure a client’s goals are met, Bamji said. Though he said that there are many ways to accomplish this, he shared three important things that advisors can do. They are:

1. Simplify and use plain language in your conversations and be consistent with the terms and definitions you use. Use real-life but anonymous examples that can help relate to a client’s personal financial situation, he advised, and try to avoid financial jargon at all costs.
2. “Ask your client open-ended questions on what matters most to them,” he said. A couple of examples would be: “What are your biggest financial worries right now?” or “How do you define financial success in retirement?”. It is best to do this early in the relationship, Bamji said, and then at least annually, as a client’s priorities and preferences change.
3. Go beyond the demographics to understand a client’s true risk tolerance. Though demographics, time horizons, and family circumstances are helpful, things like a client’s personality, reaction to potential losses and gains, and current financial-wellness-based stressors like loans, credit card debt, and family obligations, can sometimes offer deeper insights in determining a client’s risk tolerance, he said.

The PRIP online survey of consumers was conducted by Artemis Strategy Group from February 15 to March 2, 2024. The 2,516 consumers surveyed are aged 45 to 75. 567 are investors aged 45 to 72 with $150k+ in investable assets and work with a financial professional. From February 12 to March 4, 2024, PRIP 2024 also surveyed 508 financial professionals who conduct retirement planning for individual clients.

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