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New Trends in Serving Retirement Income Clients Retirement Income Symposium October 4, 2012 Boston, MA GDC Research and Practical Perspectives
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Dennis Gallant

Dec 18, 2014

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Page 1: Dennis Gallant

New Trends in Serving Retirement Income Clients

Retirement Income Symposium

October 4, 2012 Boston, MA

GDC Research and Practical Perspectives

Page 2: Dennis Gallant

2

Focus of Today’s Discussion

• Success factors in serving retirement income clients

• Developing a more effective retirement income process and practice

• Managing key retirement income challenges

Page 3: Dennis Gallant

54%

43%

3%

Well Developed

Some But Not All

Limited/None

Retirement Income Processes and Capabilities

3

• No universal approach

• Advisors differ in processes and capabilities

• Two key segments emerge: Leaders and Laggards

Source: Trends in Advisor Delivery of Retirement Income - 2012

Page 4: Dennis Gallant

Key Differences of Leaders and Laggards

4

Source: Trends in Advisor Delivery of Retirement Income - 2012

HighModerateImpact Low Interest Rates

HighModerateDegree Client Concerns

“How” or approaches“What” or contentEnhanced Capabilities

More challengedLess challengedPractice Management

Mix of fees and commissionsFee-basedCompensation

LowerHigherAsset Consolidation

LowerHigherAverage Client Assets

LaggardsLeadersFactor

HighModerateImpact Low Interest Rates

HighModerateDegree Client Concerns

“How” or approaches“What” or contentEnhanced Capabilities

More challengedLess challengedPractice Management

Mix of fees and commissionsFee-basedCompensation

LowerHigherAsset Consolidation

LowerHigherAverage Client Assets

LaggardsLeadersFactor

Page 5: Dennis Gallant

5

Focus on Retirement Income Pays Off for Advisors

Change in Retirement Income Clients Served during 2011

Source: Trends in Advisor Delivery of Retirement Income - 2012

11%

59%

28%

2% 0.3%

Increased Significantly Increased ModestlyNo Change Decreased ModestlyDecreased Significantly

Page 6: Dennis Gallant

24%

45%

31%

Minimally EngagedTransitionalFully Engaged

Key Benefits of Working with Retirement Income Clients

6 Source: Trends in Advisor Delivery of Retirement Income - 2012

28%

67%

43%

64%

14%

43%

27%

46%

77%

67%

83%

30%

65%

46%

0% 20% 40% 60% 80% 100%

Easier to Retain

Consolidate Assets

More Assets

Value Advisor/Services

More Profitable

Higher Average Assets

More Referrals

Minimally Engaged Fully Engaged

Advisors by Focus on Retirement Income Clients Retirement Income Practice Benefits

Percentage of clients near or in retirement

Page 7: Dennis Gallant

7

Success Factors

Commitment -serving retirement income clients is a core component of their practice

Well-Defined Processes –enabling them to efficiently support a rising number of retirement income clients

Planning orientation –providing a solid foundation and road map for support

Holistic perspective –going beyond investment management in the services they deliver

Educational –informing clients on the issues and challenges they will face in retirement

Customization –tailor support to specific client circumstances and needs and follow a consistent methodology for engagement

Relationship focused –taking a long-term rather than transactional approach to support

Source: GDC Research and Practical Perspectives

Page 8: Dennis Gallant

Components of the Retirement Income Process

Developing Retirement Income Clients

Retirement Visioning and Client Discovery

Creating & Managing Retirement Income

Plans/Portfolios

Monitoring, Review & Adjustment

• Positioning with new & existing clients • Communicating your process & services

• Obtain expressed and unexpressed needs/expectations

• Philosophical approach in creating income • Investing for longevity, inflation, health care,

etc.

• Ongoing support • Monitor changes, especially the first 2 years

8 Source: GDC Research and Practical Perspectives

Page 9: Dennis Gallant

Elements of Discovery

9

“Retirement distribution planning is clearly a

process and one that requires the advisor to

be very skilled at putting issues in the right

context. It is crucial to figure out what the

client needs and wants, otherwise the effort is

meaningless. A major skill is getting people to

express their unexpressed expectations and

help them address issues that have not been

well-thought-out. Dialogue and conversation

around what retirement looks like for the client

are crucial.”

Source: GDC Research and Practical Perspectives

Advisor Quote

• Help clients articulate unexpressed concerns

• Place issues in the right context

• Identify needs vs. wants

• Create a vision and a plan for living in retirement

• Include Spouse and family in the discussion

Page 10: Dennis Gallant

Expanding Services and Support

CORECORE

Nursing Home Selection

Family Counseling

CareerCounseling

Funeral Arrangements

InvestmentPlanning

Mortgages

EstatePlanning

Tax Mgmt.

Insurance

RiskMgmt.

RetirementPlanning

TravelServices

Relocation

HealthCare

Elder Care

Social Security

Personal Development

CORECORE

Nursing Home Selection

Family Counseling

CareerCounseling

Funeral Arrangements

InvestmentPlanning

Mortgages

EstatePlanning

Tax Mgmt.

Insurance

RiskMgmt.

RetirementPlanning

TravelServices

Relocation

HealthCare

Elder Care

Social Security

Personal Development

10

Non-traditional services becoming a differentiator

Source: GDC Research and Practical Perspectives

Page 11: Dennis Gallant

12%

25%

18%

67%

53%

51%

40%

12%

6%

18%

14%

21%

27%

33%

51%

44%

26%

6%

9%

14%

20%

19%

42%

64%

17%

9%

7%

29%

23%

3%You manage virtually all of their assets

You have all of the resources you needto service them

You know what their monthly expensesare

They have a comprehensive financialplan with you

You have done a formal budget withthem

They need to take income out of theirinvestments periodically to help pay for

their living expensesThey often have unexpected

withdrawals that can undermineincome planning

They have a high risk of running out ofmoney in retirement

All of them Most of them Some of them A few of them

Working with Retirement Income Clients

Statements Regarding Retirement Income Clients

11 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.

Page 12: Dennis Gallant

40%

29%

26%

24%

22%

18%

5%

25%

34%

28%

31%

32%

26%

33%

24%

25%

34%

27%

37%

32%

43%

Financial planning software

Questionnaires

Non-formal tools (e.g., "yellow pad" of paper)

Monte Carlo or other projection analysis

Worksheets

Frameworks or software that analyze a retirementincome client's needs and recommend appropriate

products to meet those needs

Client marketing and sales materials

Rely on strongly Use often, but do not rely on strongly Use occasionally

Tools and Software Used in Retirement Income

12 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.

Page 13: Dennis Gallant

What Retirement Income Philosophies Are Being Employed

13 Source: Trends in Advisor Delivery of Retirement Income - 2012

• Income Floor is growing while fewer advisors using Risk-adjusted Total Return method

34%

31%

35%Risk-AdjustedTotal Return

Pooled

Income Floor

Page 14: Dennis Gallant

Retirement Income Philosophies

• Emphasis on diversification and performance similar to how assets assets are managed for pre-retirees although generally with a more conservative, risk aware approach

-

• Assets draw down as a percentage of the portfolio that reflects client needs and circumstances, generally between 3% and 5%

• Portfolio not generally managed with income as a specific investment objective

• May create short-term reserve account to manage cash flow needs

• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities used more selectively

• Emphasis on establishing different pools of assets each with a different objective, time horizon or duration, and risk/return profile

• Generally invest in different pools or buckets with progressive five year durations and increasingly aggressive risk/return parameters

• Specific short-term pools established to generate income irrespective of current market environment

• Longer-term pools – those with a horizon of ten years or more –Invested to sustain portfolio purchasing power over time

• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles often used as core portfolio components

Total Return Philosophy Pooled Philosophy

• Emphasis on satisfying the minimum income needs of the client through a low-risk strategy, while managing the remainder of the portfolio to satisfy client “wants”or discretionary requirements depending on portfolio returns

• Generally carve out a specific portion of the portfolio to deliver consistent income to satisfy client cash flow needs no matter how the capital markets perform

• Remainder of portfolio is invested in a broadly diversified portfolio designed for total return within the risk parameters of the client, with excess returns beyond agreed upon targets harvested to meet discretionary spending desires

• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles used as core components for the income floor portion of the portfolio

Income Floor Philosophy

• Emphasis on diversification and performance similar to how assets assets are managed for pre-retirees although generally with a more conservative, risk aware approach

-

• Assets draw down as a percentage of the portfolio that reflects client needs and circumstances, generally between 3% and 5%

• Portfolio not generally managed with income as a specific investment objective

• May create short-term reserve account to manage cash flow needs

• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities used more selectively

• Emphasis on establishing different pools of assets each with a different objective, time horizon or duration, and risk/return profile

• Generally invest in different pools or buckets with progressive five year durations and increasingly aggressive risk/return parameters

• Specific short-term pools established to generate income irrespective of current market environment

• Longer-term pools – those with a horizon of ten years or more –Invested to sustain portfolio purchasing power over time

• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles often used as core portfolio components

Total Return Philosophy Pooled Philosophy

• Emphasis on satisfying the minimum income needs of the client through a low-risk strategy, while managing the remainder of the portfolio to satisfy client “wants”or discretionary requirements depending on portfolio returns

• Generally carve out a specific portion of the portfolio to deliver consistent income to satisfy client cash flow needs no matter how the capital markets perform

• Remainder of portfolio is invested in a broadly diversified portfolio designed for total return within the risk parameters of the client, with excess returns beyond agreed upon targets harvested to meet discretionary spending desires

• Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles used as core components for the income floor portion of the portfolio

Income Floor Philosophy

14 Source: Trends in Advisor Delivery of Retirement Income - 2012

Page 15: Dennis Gallant

15

Product Integration Mix

Portfolios tend to include a mix of different solutions, with multiple vehicles used

Percent allocated to vehicle for typical retirement income client

40%58%

22%11%

41%19%21%

48%5%

47%12%

42%31%

59%63%

32%43%47%

35%21%

45%45%

13%8%

14%11%

18%23%23%

12%38%

6%33%

5%

6%15%

8%16%16%

5%37%

10%

2%

2%

0% 20% 40% 60% 80% 100%

Closed-End FundsStructured Products

AlternativesCash/Money Market

SMAsIndividual Securities

ETFsIndex Funds

Actively Managed FundsSPIA/Income Annuity

VA

None Low Medium HeavySource: Trends in Advisor Delivery of Retirement Income - 2012

Page 16: Dennis Gallant

Expected Change in Vehicles Used

16

Expectation of continued shift to VAs, ETFs and actively managed funds during the coming 12 to 24 months

20%18%

29%19%21%

31%28%

13%34%

25%42%

26%32%

18%21%

26%20%

17%28%

11%21%

11%

0% 10% 20% 30% 40% 50% 60%

Closed-End FundsStructured Products

AlternativesCash/Money Market

SMAsIndividual Securities

ETFsIndex Funds

Actively Managed FundsSPIA/Income Annuity

VA

Increase DecreaseSource: Trends in Advisor Delivery of Retirement Income - 2012

Page 17: Dennis Gallant

Impact of Challenging Environment

Source: Trends in Advisor Delivery of Retirement Income - 2012

40%

45%

13%2%

Significant Moderate

Minimal No

23%

56%

19%2%

Significant Moderate

Minimal No

Impact of Low Interest Rate Environment Impact of Market Volatility/Risk

17

Page 18: Dennis Gallant

Top 5 Actions Taken

Source: Trends in Advisor Delivery of Retirement Income - 2012

18

Low Interest Rates Market Volatility

1 Increased Dividend Paying Equities Increased Dividend Paying Equities

2 Increased Guaranteed Solutions Increased Guaranteed Solutions

3 Increased Higher Yield Increased Alternatives

4 Increased Alternatives Increased Higher Yield

5 Increased Non-Traditional Income Solutions Increased Cash Allocation

Page 19: Dennis Gallant

Top Concerns in Serving Retirement Income Clients

19 Source: Trends in Advisor Delivery of Retirement Income - 2012

69%

53%

67%

68%

59%

52%

57%

56%

21%

30%

22%

20%

28%

31%

25%

30%

9%

17%

10%

12%

12%

18%

17%

14%

0% 20% 40% 60% 80% 100%

Generating Long-term Income

Generating Short-term Income

Managing Risk/Volatility

Managing Client Fears/Expectations

Educating Clients on Realities

Asset Allocation

Finding Investment Products

Preventing Client Overspending

Concerned Neither Unconcerned

Page 20: Dennis Gallant

Practice Management Challenges in Serving Retirement Income Clients

20 Source: Trends in Advisor Delivery of Retirement Income - 2012

Page 21: Dennis Gallant

40%

35%

19%

4% 2%

Strongly Agree

Somewhat Agree

Somewhat Neither

Somewhat Disagree

Strongly Disagree

Interest in New Approaches

21 Source: Trends in Advisor Delivery of Retirement Income - 2012

Advisors are open to new ideas including products and services

Page 22: Dennis Gallant

But Support Providers Don’t Get High Marks

38%

30%

18%

19%

15%

18%

11%

13%

50%

42%

43%

41%

44%

30%

38%

39%

10%

22%

32%

28%

34%

37%

43%

34%

1

2

3

4

5

6

7

8

9

10

11

Excellent Very Good Fair

Knowledge of their own products or solutions

Wholesalers

Broker-dealers/custodians

Knowledge of retirement income planning issues and strategies

Wholesalers

Broker- dealers/custodians

Knowledge of competitor products or solutions

Wholesalers

Broke- dealers/custodians

Understanding of your practice and your retirement income approach

Wholesalers

Broker-dealers/custodians

Advisors Ratings of Retirement Income Support

22 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.

Page 23: Dennis Gallant

And There Is Room For Improvement

20%

18%

10%

18%

12%

16%

7%

20%

8%

16%

45%

41%

34%

34%

32%

34%

34%

35%

26%

31%

29%

31%

42%

36%

47%

36%

47%

32%

51%

40%

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Excellent Very Good Fair

Providing marketing or sales ideas

Wholesalers

Broker dealers/custodians

Providing training or certification

Wholesalers

Broker dealers/custodians

How to build and manage more effective retirement income portfolios

Wholesalers

Broker dealers/custodians

Practice management assistance

Wholesalers

Broker dealers/custodians

Helping you build a retirement income practice

Wholesalers

Broker dealers/custodians

Advisor ratings of support capabilities

23 Source: The Current State of Retirement Income Sales Support -Practical Perspectives, GDC Research, and Mathew Greenwald & Associates, Inc.

Page 24: Dennis Gallant

3%

7%

15%

11%

17%

23%

82%

80%

62%

0% 20% 40% 60% 80% 100%

Retainer

Hourly

Planning

Frequently Occassionally Infrequently/Never

Advisors Need Balance Capacity and Compensation

Source: Trends in Advisor Delivery of Retirement Income - 2012

• Retirement income support takes more time, especially client service and support • Advisors are providing more advice, but advice based compensation is underutilized

Client Service 29%

Investment Research/Portfolio Creation 14%

Prospecting/Marketing 13%

Rebalancing/Portfolio Oversight 12%

Financial Planning 11%

Compliance 6%

Estate Planning/Insurance/Non-Investment 6%

Budgeting/Income Management 4%

Staff Management 4%

Other 2%

Use of Alternative Fees Time Spent on Key Functions

24

Page 25: Dennis Gallant

25

Dennis Gallant, President GDC Research (781) 314-0606 office (508) 397-9296 mobile [email protected] www.gdcresearch.com

Contact Information

Howard Schneider Practical Perspectives (978) 590-7290 [email protected] www.practicalperspectives.com

Retirement Income Research • Advisor Best Practices in Delivering Retirement Income & Transition Support (Q3 2008)

• Examining Best Practices in Constructing Retirement Income Portfolios (Q2 2009)

• Update: Advisor Best Practices in Retirement Income (Q4 2009)

• The Continued Evolution of Retirement Income Delivery: An Analysis of Leading Practices in Advisor Support (Q2 2010)

• Trends in Retirement Income Delivery: Advisor Portfolio Construction, Product Usage, and Sales Support (Q2 2011)

• Trends in Advisor Delivery of Retirement Income (Q1 2012)

• The Current State of Retirement Income Sales Support (Q2 2012)