Golden chance to do right by retirees

During the past year, US regulators have banged the drum with a message that the financial services industry must protect senior citizen investors. But it is not clear that they and the financial services firms they watch over are playing a coherent tune or instead just raising clatter – and drowning out a big opportunity for the industry to right itself.

To be sure, it is heartening to see regulators sternly persuading the industry to protect older investors in retirement from fraud, imprudent advice, and improper sales tactics, particularly given that most baby boomers will not be able to plug into pension plans but instead must rely on their own personal retirement accounts. The number of US residents aged above 65 is set to more than double to 89m by 2050, but many are trudging towards their retirement with inadequate reserves.

Against this backdrop, regulators appear to have ratcheted up their warnings and reminders. A year ago, Financial Industry Regulatory Authority chief executive Rick Ketchum shot a dart into a large industry gathering, telling executives he was “troubled by products and practices that prey on seniors”.

Then, during the summer, US regulators stood shoulder to shoulder, alerting the industry to their “increasing expectations” as they issued a report on best practices at financial firms to ensure compliance and appropriate investment strategies in dealings with older investors.

And in September, the Securities and Exchange Commission used a bullhorn to further underscore the point, charging a Colorado adviser with fraud and breach of fiduciary duty, alleging his firm falsely presented its hedge funds, which held $174m from 100 investors, as suitable for conservative retirees when in fact they were riskier – and suffered big losses in 2008. Various signs suggest that big US wealth firms have heard the message. Many have upgraded compliance practices, supervisory procedures, and training efforts around serving elderly clients, says W. Hardy Callcott, a partner in San Francisco at law firm Bingham McCutchen.

And hashing out the proper compliance process to handle senior investors has become a luncheon topic de rigueur, says Christopher Davis, president of the Money Management Institute. “I would weigh 800lbs if I went to all of the events I was invited to on this topic,” he says.

But the whole regime of admonishment from regulators and tighter compliance from advisers and product designers really only is a loud clap to remind everyone to follow the existing rules about delivering “appropriate” products to clients. It does not give senior investors any safer passage to financial wellbeing.

Indeed, the current rules still allow firms to target seniors with expensive products that might not be good investments, and there is no shortage of questionable choices. For more than a decade, the economic potential of the baby boomer retirement wave fuelled excitement, sparking a gold rush of product development, marketing campaigns and client wooing. But many products hatched in this setting – such as variable annuities or target date funds – may be more profitable for firms than they are beneficial to older investors, says Ben Valore-Caplan, managing partner of Denver-based Syntrinsic Investment Counsel.

A narrow focus on compliance also does not go far enough to address another sore fact – the industry’s thick share of responsibility for igniting the 2008 crash that left millions of older investors with depleted coffers.

The table is set for asset management firms to make amends. They have an opportunity to mobilise to offer a new deal at retirement: guaranteeing the long-term economic security of all retirees.

Such an effort would ask financial services firms to partner through their associations and industry groups to target their most faithful clients not with a suite of sales pitches but with a gold standard of best practices, products, and advice to ensure that the wealth retirees have accumulated will last as long as possible.

This endeavour would force wealth management companies to agree on which investment paths are most suitable for older investors. And it may require them to adjust expectations for lower profits from the retirement phenomenon. But by putting older investors on a high pedestal, the financial services industry could also elevate itself to a new – uniquely marketable – stratum of trust.

Tom Stabile is a reporter on FundFire, a Financial Times publication