Challenge for Advisors:
Help Retiring Clients Face Reality

 

ENVESTNET PRACTICE MANAGEMENT SERIES

»

“Our nest egg fell out of the tree.”

Not every client uses words as vivid as these, but no matter how it is stated, the message is clear. For countless retiring Americans, the reality is disappointment and worry. And no one understands this situation better than you, their financial advisor.

Even with stock markets up from the low point in March 2009, massive problems linger and dominate the economy. Unemployment, the housing market and distrust of financial institutions are a constant for Americans of all income and asset levels. Fears of a “double dip” downturn appear plausible as the economy stagnates.

Even experts were blindsided and baffled by economic events of the past few years. Former Federal Reserve Chairman Alan Greenspan acknowledged, "In the business I was in, I was right 70% of the time, but I was wrong 30% of the time."*

Conscientious advisors are helping clients confront reality, giving them the good news and the bad news. They are not taking the easy route. Instead, they are functioning as true consultants, looking at each individual client and balancing goals, desires, family commitments and financial circumstances.

Clients who expected a comfortable retirement are out of work. The employment market is reconfigured as new job descriptions emerge and old skills are no longer needed. Others believe that, as older workers, it is more difficult to find new jobs.

Yet the American dream lives on. The decade of 2000-2010 is seen as a lost decade for the investors, but baby boomers born between 1946 and 1964 lived with a fairly steadily rising stock market for most of their lives. Second, depending on their location, homeowners could count on a steady, if unspectacular, increase in prices that, at the very least, tracked inflation. Houses sold within hours, days and weeks. The ability to readily buy or sell a house was a way of life.

Although numerous studies conclude that a large number of Americans have not saved enough for retirement, boomers have been conditioned to expect a carefree and happy retirement – the kind where the couple stands on a beach holding hands, or smile while the grandkids play in the foreground.

Couple high individual expectations with an economy that surprised our most brilliant financial leaders, and you have a dilemma that calls for skills like yours -- a large measure of communication and practical knowledge-based information.

A clear choice

Today, more than ever, you are faced with a challenge to provide a blend of understanding and goal-setting with the hard facts of financial reality. Then, you must guide your client to a plan that will work – solutions that are not perfect but seek to offer the best possible retirement life for your clients.

Conscientious advisors are helping clients confront reality, giving them the good news and the bad news. They are not taking the easy route. Instead, they are functioning as true consultants, looking at each individual client and balancing goals, desires, family commitments and financial circumstances.

How much easier it would be to identify a process or product that the client will readily accept – then hope that the future takes care of itself.

A new mind set: help clients recognize reality

Even with the stream of media reminders – mortgage defaults, unemployment rates, and money saving ideas – helping clients recognize their personal situations can call for confronting long-held dreams and plans.

Maintain outside income

Even with a pension, clients may not be positioned to fully retire. A few more years of even modest additional employment income can bridge the gap between other revenue sources and expenditures.

Advisors are recommending that clients continue to work. Staying longer at an existing 9-5 job is just one option. The employment market is flexible, and a boomer can tap into that positive environment. It might mean starting a second career, working part-time, or turning a hobby or special interest into an income-generator. The power of the Internet is a silver lining – allowing people to work from home or create an online business.

(Since social security payments are based on the highest of 35 earnings years, additional years of earned income can boost benefits for people who have not worked consistently as adults. Women who dropped out of the labor force to raise children are an example.**)

Reduce current and avoid future expenses

Giving up on plans and dreams is not easy. But the trend these days is to spend less. The result is painful for tourist destinations, restaurants, retail establishments – many of which are struggling financially and closing or pulling back themselves. Clients may believe they have cut back as far as possible, but you can be an objective resource. Review spending categories, ask questions, set priorities. Can your client take a vacation near home and enjoy it almost as much as a trip to Italy? Is a second car really a necessity?

Talking with clients

In what ways are advisors delivering difficult information to their clients? Communication that educates the client and brings you together as a team making the decision together will make it easier to deliver bad news.

Once a set of assumptions has been developed, the most common approach is to develop series of scenarios. This tactic underscores the position that you and the client are working together toward a goal, and it sets the scene for the client to emotionally accept an outcome that he or she can live with.

“Show, don’t tell,” the saying goes. Present a progression of outcomes that take macro assumptions such as capital markets growth into account, allowing for risk tolerance. Second, incorporate budget assumptions unique to the client, including a hierarchy of expenses. These begin with fixed expenditures such as mortgage, utilities, healthcare and move toward dream-type desires such as support for children and grandchildren, a second home, or travel.

“We will also send the client home with the analysis and ask them to come up with a scenario that we should run,” says one advisor.***

Another advisor emphasizes the positive. “Rather than focusing on the need to quit work, why not focus on the need to continue working so that your retirement years will be more pleasurable?”^

Investment options today

Clients are looking for advisors who will manage their available assets for stability, growth and risk tolerance. That calls for careful attention and strong skills today. Whether the client is still in the pre-retirement accumulation stage or is about to begin distribution, the options are challenging and imperfect.

Consider the pros and cons of widely used income-generating investment vehicles – in an environment where safety of principle and income are paramount.

•    Fixed income / bonds. Bonds performed well in recent years in response to declining interest rates. Today, current yields are low relative to historic rates and thus produce low levels of income. Further, when interest rates increase, bond prices will decline.

•    Dividend-paying stocks. Equities with dividends offer opportunity for growth of principal and income. However, a dividend is dependent on a company’s continuing earning stream, and as with all stocks, volatility is an ever-present factor.

•    Annuities offer a predictable income stream, yet purchases today can lock owners into today’s low-interest environment. Liquidity is limited and usually incurs penalties.

Withdrawal strategies that make a difference

As you meet with and work with your client, the goal is to define a withdrawal process that is realistic and will be effective for years into the future. A formal Withdrawal Policy Statement, goals-based reporting and time-segmented distribution are tactics that can keep your client and you on track.

Withdrawal Policy Statement

Just as the Investment Policy Statement (IPS) stands as a record and planning guideline for the client and advisor, so does a Withdrawal Policy Statement (WPS) create agreement on retirement finances going forward. In retirement, almost all the issues of the pre-retirement accumulation phase are present, points out an article in the Journal of Financial Planning. For retirement, however, there is an additional layer of decisions relating to a client’s desired lifestyle, goals, level of withdrawals and identifying the means to assure the withdrawals.

Just as with an IPS, the Withdrawal Policy Statement is a proactive approach to specifying agreed-upon goals, policies and parameters. The WPS should be “broad enough to encompass new or unexpected events as they arise. Second, it should be specific enough so that we are rarely in doubt as to what action to take in response to changing events.”^^

Beginning with goals and policy statements, the WPS identifies level of withdrawals, assets that will be used for that purpose and a method for determining the withdrawal rate. It would also identify levels for adjustments that might be triggered by investment market events. Allowances for the need or desire for additional income can be planned, long before emotions have entered into the discussion.

In short, a WPS records the retirement plan, identifying responsibilities of both the client and the advisor.

Goals-based reporting

Goals-based reporting shows how a client’s investments are performing in relation to benchmarks that have been set with the advisor. A bar-chart visual is included in reports, and advisors can view reports on a daily basis.

As part of an integrated reporting system, goals-based reports mean you can monitor and anticipate meaningful changes in a client’s assets. With the information that is part of the reports, you can quickly and easily determine whether and when to contact a client, enhancing communication and managing expectations before a situation becomes urgent.

Time-segmented distribution

A time-segmented distribution strategy can address the fears of nervous clients, affected by volatility in the investment markets. The strategy separates the retirement years into segments based on anticipated lifestyle changes. For example, you might determine that the five or ten years immediately following retirement will be the most active for your client; short-term cash and equivalent investments for these early retirement years will assure planned withdrawal levels. Segments for future years and changing lifestyle needs are typically divided into five – ten year “buckets.” With a longer time horizon, they can incorporate investments which are positioned for growth, such as stocks.

Envestnet’s PlanHorizon has been designed to support a time-segmented distribution strategy.

Help clients confront the issues

It might be tempting to take the easy route, offering a product that the client seems to want, rather than solutions you believe are more appropriate and effective. In the long run, though, relationships and client retention will be stronger and your business will prosper as you find ways to deliver difficult news and then offer solutions that can help solve problems.

The nest egg fell, but you can help your clients put it back in the tree, even if it may be on a lower branch.

---

 

* www.usatoday.com/money/industries/banking/2010-04-07-financial-crisis-commission_N.htm

** www.fairmark.com/retirement/socsec/pia.htm.

*** How to Tell Clients They Can’t Retire Yet by Ed McCarthy CFP, Research Magazine, August 5, 2010.

^ How to Tell Clients They Can’t Retire Yet by Ed McCarthy CFP, Research Magazine, August 5, 2010.

^^ The Withdrawal Policy Statement by Jonathan Guyton, CFP®, Journal of Financial Planning, June 2010, pages 41-44.

 

This article is provided for informational and educational purposes only. It is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation of an offer, or a recommendation, to buy a security. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Investment decisions should always be made based on the investor's specific financial needs and objectives, goals, time horizon, and risk tolerance. The statements contained herein are based solely upon the opinions of Envestnet. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Neither Envestnet nor its representatives render tax, accounting or legal advice. Past performance is not a guarantee of future results.

FOR FINANCIAL ADVISOR USE ONLY.