Registered investment advisers are stepping up their efforts to assist “baby boomers” — born between 1946 and 1964 — to prepare for retirements that will last longer than those of previous generations.
Eighty per cent of the advisers in this year’s Financial Times Top 300 RIAs, which on average advised on $2.6bn in assets in 2015, cater to baby boomers.
Most people in this group have a large retirement savings gap to fill, says Leon Loewenstine, managing director of RiverPoint Capital Management in Cincinnati, Ohio. “A lot of the baby boomers’ parents worked for a single company and walked away with a pension,” he says. In contrast to their parents, baby boomers need to have saved more and planned early to enjoy retirement, he adds.
The biggest challenge to boomers is their longer lifespans. They are now living into their 90s, so planning for longevity is essential, says Howard Schneider, president of Practical Perspectives, a Massachusetts-based wealth management company.
A survey of RIAs by the Limra Secure Retirement Institute found that 96 per cent offer boomers retirement income planning as a core service.
Planning how to tap into social security benefits has been a big growth area, the survey found. About 67 per cent of the RIAs offer strategies for claiming social security and healthcare planning, compared with 26 per cent in 2011.
About 97 per cent of the RIAs questioned by Limra offer income planning services for the required minimum distribution in the US. This is higher than 62 per cent of RIAs surveyed in 2011. The required minimum distribution is the withdrawal of a minimum amount from a US retirement plan every year after its beneficiary turns 70 years and six months old.
About 81 per cent of the RIAs surveyed are concerned about clients’ long-term healthcare expenses compared with 43 per cent in 2011. They recommend long-term care insurance to protect retirement savings.
Planning for Roth individual retirement accounts — in which taxes are paid on money going into the account but withdrawals are tax-free — also saw a boost: 91 per cent of the RIAs surveyed offered this compared with 72 per cent in 2011.
“RIAs have expanded retirement planning activities a lot and the scope is widening day by day,” says Jafor Iqbal, assistant vice-president at Limra.
In another survey, nearly 60 per cent of 800 US citizens aged 53-69 questioned by the Insured Retirement Institute expected social security to be a main source of their retirement income, up from 42 per cent five years ago.
However, many baby boomers will probably have to delay their retirement plans in order to achieve higher social security payments, especially as defined benefit plans or traditional pensions are no longer available.
Michael Herndon, vice-president in charge of financial resilience at AARP (formerly the American Association of Retired Persons), says: “Many baby boomers and later generations will need to increasingly rely on creating efficient streams of retirement income from their own savings.”
Advisers will also discuss more fundamental general finance questions that are becoming increasingly important to clients, especially for those who will use social security as a de facto pension and Medicare as their main healthcare system.
RIAs are also more likely than other types of financial advisers to favour instruments such as exchange traded funds and passively managed funds. They are frequently more sensitive about the costs of products and “insurance products tend to be commission-based, so it doesn’t fit with their model”, says Mr Schneider of Practical Perspectives.
“They also tend to believe they can outperform the market compared to using higher cost products and can provide a better experience for their clients that way,” he notes.
Succession: few plan for future
US financial advisers are a greying group that is likely to shrink significantly in the coming years, reports Matthew R Beaton.
The pool of overall advisers — as opposed to to the elite FT 300 registered investment advisers — shrank by 9.1 per cent from 2005-14, according to research company Cerulli Associates.
The lack of replacements could become a problem. Fewer college graduates are willing to slog through extensive training programmes at broker-dealers and wade through regulatory red tape to become financial advisers, says Alois Pirker, research director at Aite Group.
Wealth managers such as Merrill Lynch, Morgan Stanley, UBS and Wells Fargo were once the breeding ground of the next generation; now their on-the-job learning takes much longer and they are producing fewer advisers.
The steep learning curve — coupled with the US Department of Labor’s new fiduciary rule that requires advisers to put their clients’ best interests ahead of their own — will cause a further contraction in the market, Mr Pirker says. He predicts the adviser headcount may drop by as much as 25 per cent in the next 10 years.
The large segment of ageing advisers has forced wealth managers to focus on succession planning. The industry has slowly realised how important starting earlier in the process is because it can take several years to find and groom replacements.
The irony is that while many advisers are able to help clients prepare for the future, it seems that they are ill equipped to deal with their own transition plans.