Advisors focused solely on wealth accumulation are unlikely to survive the retirement of boomers, whose planning needs are becoming more complex, a panel of experts predicts.
Advising baby boomers has so far been relatively straightforward and focused primarily on wealth accumulation. However, their planning needs will become much more comprehensive as they retire.
“Earnings management, tax efficiency and risk management – these are the markets of the future,” said Investor Economics president Earl Bederman, speaking at the IFIC annual conference last week. “The key to success is the ability to differentiate the need for accumulation, which will remain very strong, in the case of withdrawal solutions that are not necessarily product-oriented.”
Given longer life expectancies than previous generations, baby boomers will continue to need to accumulate wealth. But, Bederman said, today’s advisors underestimate the impact the retirement phase will have on their practice. Retiring baby boomers whose registered retirement and tax-deferred assets are entering the withdrawal phase risk losing 40% or more of their wealth if an advisor fails to implement a tax-efficient financial plan.
In a wealth management industry largely focused on asset accumulation, the prospect of a large portion of client assets melting away is not something advisors look forward to. Companies are desperately looking for ways to retain the wealth of boomers, which Bederman estimates will account for 87% of all Canadian wealth by the end of the next decade.
Brenda Vince, CEO of RBC Asset Management, expects financial services companies to try to retain investor wealth by focusing less on product and more on selling services.
“We’re starting to talk a little more about product allocation, like managing products for boomers in insurance, like long-term care insurance with other investment products,” he says. “I think we will get to a point where advisors will offer their clients a sort of matrix of life solutions.”
Vince believes that ultimately the demand for comprehensive wealth management will shift advisor compensation from commission to fee-based advice.
“There was nothing wrong with advisors focused on asset accumulation products being paid entirely from assets. As they move beyond the asset accumulation phase, they must seriously consider adopting a fee-based model,” she said. “There are no universal products. We have to be very careful about this. There is a big difference between the planning needs of a 65-year-old man with emphysema and a healthy 65-year-old woman.
Robert Strickland, president of Fidelity Investments Canada, believes product manufacturers have an important role to play in developing products specifically designed to meet the unique needs of retired baby boomers to grow with their incomes.
“We know that more innovative products need to be introduced at the retirement spending stage,” he says. “We need to do this in a way that keeps the product simple for investors. Investors want their products to be simple, they want them to be easily understood, but they also want them to be optimized.
So far, the insurance industry is leading the way by developing products with guaranteed minimum payout benefits, which are add-on features that can be purchased as part of a segregated fund arrangement.
Investor Economics has estimated that the market specifically for GMWB in Canada could be worth as much as $40 billion. According to the National Variable Annuity Association, GMWBs are just one type of variable annuity products that are widely available in the US. According to the National Variable Annuity Association, the value of Variable Annuities is already $1.5 trillion.
The United States is also proving to be a hotbed for alternative funds aimed at baby boomers for retirement. U.S. parent Fidelity has received a lot of attention for 11 new fund-related products it recently launched in the U.S. called Fidelity Income Measurement Funds, which offer an income stream similar to variable annuities but without the higher costs associated with an insured investment.
Posted by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com
(10/11/07)
