Advisors must do more than create wealth

Advisors focused solely on wealth accumulation will likely not survive the retirement of the boomers, whose planning needs are becoming increasingly complex, a panel of experts predicts.

Advising boomers has been relatively simple up until now, with the focus having been primarily on wealth accumulation. But their planning needs will become much more comprehensive as they enter retirement.

“Income management, tax efficiency and risk management — these are the markets of the future,” said Investor Economics president Earl Bederman, speaking at IFIC’s annual conference last week. “The keys to success are one’s ability to vary the need for accumulation, which will remain very strong, with payout solutions that are not necessarily product oriented.”

With a longer projected lifespan than previous generations, boomers will still need to accumulate wealth. But, Bederman said, advisors today underestimate the effect the payout phase of retirement will have on their practice. Retiring boomers, with pension- and tax-deferred registered assets entering the payout phase, risk losing 40% or more of their wealth if the advisor doesn’t enact a tax-efficient financial plan.

For a wealth management industry heavily focused on asset accumulation, the prospect of watching a large chunk of client assets melt away is not something advisors look forward to. Companies are desperately seeking ways to retain the wealth of the boomers, which Bederman estimates will represent 87% of all Canadian wealth by the end of the next decade.

Brenda Vince, CEO of RBC Asset Management, expects that financial services firms will try to retain investors’ wealth by focusing less on product and more on selling services.

“We are starting to talk a little more about product allocation, such as managing products for boomers in insurance, such as long-term care insurance with other investment products,” she says. “I think we’re going to get to a point where advisors are offering a sort of life solution matrix for their clients.”

Vince believes that ultimately this demand for total wealth management will shift the advisor compensation from commissions to fee-based advising.

“There was nothing wrong with advisors focused on asset accumulation products being paid entirely from the assets. As they move past the asset accumulation phase, they have to seriously look at adopting a fee-based model,” she said. “There are no products that will be one size fits all. We do have to be very careful about that. 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 there is an important role for product manufacturers to play in inventing products specifically designed to address the unique growth-with-income needs of retiring boomers.

“There is recognition by us that there needs to be more product innovation for the spending phase of retirement,” he says. “We need to do that in a way that maintains the simplicity of the product for investors. Investors want their products simple, they want [them] easily understood, but they also want [them] optimized.”

So far, the insurance industry has led the way, developing guaranteed minimum withdrawal benefit products, which are add-on features that can be purchased with a segregated fund contract.

Investor Economics has estimated that the market specifically for GMWBs in Canada could be as high as $40 billion dollars. GMWBs are only one type of variable annuity products that are widely available in the U.S. Variable annuities already account for $1.5 trillion US, according to the National Association for Variable Annuities.

The U.S. is also proving to be a breeding ground for fund alternatives targeted toward retiring boomers. Fidelity’s U.S. parent has received considerable attention for 11 new fund wrap products it recently released in the U.S., called Fidelity Income Replacement Funds, that offer an income stream not unlike variable annuities but don’t have the more expensive cost associated with an insured investment.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com