Why Demographic Differences Define How Advisors Should Talk to Clients

“If I had dropped out of college when I was a freshman, I would be a billionaire now. But my mother forced me to finish my education, so now I’m only a millionaire.” — Andrew Mason, Founder and former CEO of GroupOn

This quote was provided by Marilyn Moats Kennedy, CEO of Moats Kennedy Inc., who is a career consultant based in Chicago. She used this quote as an example of how the Millennial generation has a radically different mindset from others. Dropping out of college to pursue your dream is seen as a failure by Baby Boomers, but as a valid option by Millenials and one that could even be the catalyst to make you rich.

Financial advisors must craft their messages differently, depending on the target demographic that they would like to reach, Moats Kennedy explained. Through the use of extensive surveys, she has found that each age group not only views the world through different paradigms, but have different fears, different life goals and different ways they prefer to communicate.

This article is a summary of a session from the Money Management Institute’s 2014 Annual Convention, which was held in New York City.

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7 Questions to Help Pivot Your Practice Towards Retirement

This is a summary of a session from the Money Management Institute’s Fall Solutions Conference that was held in October 2013 in New York City.

Moderator: Ron Fiske, Managing Director, Strategic Partnerships, Envestnet

Mary Deatherage, Managing Director, Wealth Management Advisor, Morgan Stanley
Samuel M. Kiefer, Director of Wealth Management, Partner, Risk Paradigm Group, LLC
Michael Lodes, Financial Advisor, Edward Jones

1. Do you need to pivot your practice towards retirement as your client base ages?

Deatherage, who was recently named to Barron’s Top 100 Women Financial Advisors, pointed out that the aging of investors will eventually affect the entire advisory industry.  The average Morgan Stanley client is 59 years old.  Retirement planning is an evolutionary process and advisors should be prepared to provide more customized planning services for their clients, she said.

Not only will the average client become older, but they will need more advice.  According to a survey by Lincoln Financial Group, 54% of affluent 70-year-olds found that controlling their finances throughout their lengthy retirement has proved to be more complicated than they envisioned.

The standard client meeting agenda at Risk Paradigm Group has changed from as recently as five years ago, Keifer explained.  The management of retirement income has become the top issue that clients want to discuss.  This runs parallel to traditional conversations about preservation, transfer and the gifting of capital, he noted.

In the past, it was common to base retirement planning on a 5.5% annual rate of return, Deatherage observed.  Recent studies have shown that an average return of as low as 2.8% should provide a decent probability of success (using Monte Carlo Analysis). However, in the current near 0% interest rate environment this could be tricky, she said. Continue reading

Can Financial Soundings Help Advisors Improve Their DC Plan Scalability?

The Defined Contribution (DC) Plan segment is attractive to many financial advisors as a hedge against volatile markets, since participants in DC plans supply a dependable stream of income, due to automatic deductions. More advisors are leveraging their relationships with employers to cross sell wealth management, group benefit, rollovers and retirement income services.

As attractive as the DC market is, only half of advisors are currently servicing any plans. According to a 2010 industry report from The Retirement Advisor University:

There are 300,000 financial advisors (FAs) actively servicing the investing public; 50% or 150,000 have at least one plan; 75,000 have at least 3 plans; and 15,000 or 5% of the market have 5 or more plans which signals that they are starting to get serious. There are fewer than 5,000 “elite” DC advisors (advisors who have 10 plans, $30 million AND 3 years of experience).*

According to Fred Barstein, Founder and Executive Director of The Retirement Advisor University, of the 625,000 DC plans with assets between $250,000 and $100 million, 18% do not have an independent advisor.

This represents a huge opportunity for advisors to expand their business and diversify their revenue sources. But most would probably need help in order to break into the DC market.

I recently interviewed Kurt Miller, CEO of Financial Soundings, an investment advisory firm that has developed a technology solution that advisors can leverage to scale their advice model and support multiple DC plans without adding staff or impacting other parts of their business. Continue reading

Which Financial Planning Software is Right For You?

This is a summary of panel discussion from the Tools and Technology Today (T3) Conference that took place February 11-13, 2013 in Miami, FL.

Moderator: Linda Brady, EnvestNet


I liked the composition of this particular panel.  Two of the well-established vendors that dominate the market matched with two upstarts looking to innovate their way to the top.  It made for a livelier discussion.

What is your firm’s approach to financial planning?

One of the goals of inStream Solutions is to amplify the ambitions of how software can help a wealth management firm, Murguia announced.  It’s difficult for advisors to justify their fees when they are always in a reactive mode, he claimed, so the inStream software can proactively guide clients through their life cycle to help them to make the right decisions in everything that intersects finance.

The investment-centric approach is dying on the vine, Murguia proclaimed, since building model portfolios has become a commoditized business.  Advisors who insist on staying investment-centric will probably succumb to LearnVest or someone similar, he said.  The advice industry has to  compete against retirement calculators and other free tools since advisors are using them on the side anyway.  Planning software should not only identify opportunities but also help coordinate them to keep advisors from having to go to a third party system, he said.

The folks at Zywave believe that there is both an art and science to financial planning, Strachan asserted.  They provide the science and the advisor provides the art.  Their software avoids complex optimization strategies in order to emphasize the advisor’s skills and their value added to the process, she stressed.

Tishkevich believes that the future of advice is in mobile since it can deliver effective engagement and improves client communication.  His firm released a mobile app called RetireLogix, which is available for both iOS and Android.  The app can be branded to become a sort of personal digital business card, he noted.

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NorthWestern Mutual to Roll Out LifeYield iPad App to Advisors

NorthWestern Mutual rolled out a new investment platform for advisors that integrates technology and services from a number of different vendors to provide and end-to-end wealth management experience. A big part of this platform is retirement planning and the core of this is provided by LifeYield, which will soon include an iPad app for advisors. Details about the new platform were presented by Erin Ennis, Senior Investment Consultant, Northwestern Mutual Wealth Management Company and Jack Sharry, EVP, Strategic Development, LifeYield in a session at the Money Management Institute’s 2012 Tech & Ops Conference, which was held in Jersey City, NJ.

Sharry observed that a typical investor in the mass affluent segment and above has 2-3 advisor relationships at different firms along with five or six accounts at each. Most of these investors are open to the idea of consolidation, but need a good reason to do so, he said. NorthWest Mutual’s platform conforms to a new approach to retirement planning recently developed by the MMI Retirement Solution Committee, of which Jack Sharry is chairman. The approach is called Personal Retirement Income Solution Management (PRISM) and is explained in a white paper entitled An Emerging Category: Personal Retirement Income Solution Management.

NorthWestern Mutual’s platform was designed to provide advisors with a set of compelling argument for clients to consolidate assets with them. it provides advisors with powerful tools to assist clients in planning for and optimizing cash flow during their retirement, Sharry said.

LifeYield iPad App Retire 2012

The LifeYield iPad app will enable NorthWestern Mutual’s advisors to demonstrate to clients how they are progressing towards their retirement goals quickly and easily, according to Ennis. They can click one button and change the inputs and the app will instantly show the effects on their future savings. The app, which is called LifeYield Illustrator, speeds up processing by using default mortality tables, running scholastically, with an inherent level of success in meeting minimum level of thresholds, driven by NorthWest Mutual’s capital assumptions, he said.

For example, say a client wants to have $1 million in income starting the first year of retirement. After entering their current state into the system, it will promptly generate a display as shown on the right. In this case, the system projects that the client will only have $710K in income, even with tax optimization. To try and rectify this, the advisor can quickly push the retirement date out five years and recalculate. As you can see in the next screen, the result of the change is that their projected income is now $995K, which is just about at their goal.

Ennis explained that advisors can run alternative scenarios in a matter of minutes. The LifeYield system is efficient, accurate and consistent and ensures that the advice being provided is directionally correct. This helps to establish a sound, proven judicious planning process, he said.

Increasing Wallet Share

LifeYield has a history of working with managed accounts, according to Martin Cowley, LifeYield’s EVP of Product Development. The system helps clients to methodically Retire 2017generate the most retirement income possible from a preexisting set of investments. But it isn’t a simple process, he said. There are many inputs required in order to generate a retirement income stream including withdrawal sequencing, tax optimization, and the firm’s capital markets assumptions, to name just a few.

Some recent research done by Ernst & Young and commission by LifeYield discovered large benefits when properly locating assets before retirement, Cowley reported. This minimizes the future tax footprint across the same set of assets. A high level display of simple asset locations on the future iPad app is shown on the right. It shows bonds located mainly in the IRAs and equities located mainly in the taxable accounts, in a simplistic format that can be shown to clients.

In order to allow advisors to demonstrate these benefits to their clients, LifeYield took their trading algorithm and baked it into a Monte Carlo Simulation and played it out over time, which is then represented graphically, he said.

If the advisor has access to a list of the client’s outside assets (those that are managed by other institutions), LifeYield can evaluate them and generate a report showing the potential increases in assets and retirement cash that the system could generate when compared to where they are managed now. This type of report can be extremely helpful to advisors in order to increase their client wallet share and encourage them to consolidate assets, Cowley proposed.

Four Doughnuts

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iPad App Review: goalGetter

This is a review of the goalGetter iPad app from ASI Advisor Software.

goalGetter is a personal financial planning app targeted at the end investor.  It is a very simple tool designed to help plan for large financial events.  It’s easy to use with a clean, intuitive layout that allows you to drag and drop to create goals.

The available goals include Retirement, Home & Property, Education, Big Toys (cars, boats, etc.), Life’s Milestones (weddings, babies, etc.), Vacations, Charity and Medical Bills.  You can set an unlimited number of goals, but the interface gets cluttered when you have more than a ten or so.

The app’s single screen consists of a bar graph with dollars on the vertical axis and time on the horizontal. To create a goal, just select an icon from the list at the bottom and drag it onto the graph.  Dragging the icon up down changes the estimate cost and left and right changes the year the goal needs to be funded by.  This function is quite simple to use.

There is an icon of a piggy bank that is stuck on the first year of the graph.  You can drag this icon up and down to change the amount of money you current have in savings.  The bar chart instantly changes to show how much you will have saved going forward (green bars) and whether you will have a funding deficit (red bars) when it comes time to pay for your goals.

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Why Bond Portfolios are a Flawed Retirement Strategy

This post is a summary of a session from the FRA’s 8th Annual Managed Accounts Summit.

There are three phases of life and three phases of investing based on a client’s income needs: Growth Only, Growth and Income and Income Only, according to Michael Jones, Founding Partner, Riverfront Investment Group. For retirees in the Income Only phase, what they really need is a cash flow that grows.

Instead, what the industry has done is use systematic withdrawals and build a growth portfolio with a little lower volatility and then hope that everything will work out, according to Michael. The financial crisis showed a major flaw in this strategy. Suddenly a 6% annual withdrawal became a 9% annual withdrawal due to the drop in valuation. If you’re blowing a hole in your portfolio on year one, it’s really hard to bounce back, he observed.

“What do retirees want?”, Michael asked.  They want a quarterly statement from their asset manager that has the same number on it as it did last quarter.  That’s how they define safety.  What do they need?  Income.

Because of this, Michael pointed out that retirees are scared and they’re running to bonds.  They didn’t want bonds back in 1990 when interest rates were at 9% or in 2000 when they were 7% or in 1984 when they were 14%.   Now we have 2 ½% treasuries and they can’t get enough of them!

According to an article Michael recently published (“The Bond Bubble: Are Your Portfolio’s “Safe” Assets Safe?”), he expects deflation will be avoided and “history suggests that bonds currently offer extremely low potential returns in exchange for a substantial risk of loss. For example, if 10-year Treasury yields rise to 4%, a level seen as recently as April 2010, bond investors are likely to incur a principal loss of approximately 10%.”

In this environment, if we don’t get inflation, bond investors will be hit hard. As Michael explained, while treasuries were overvalued, corporates, mortgages and high yield were so cheap you could get away with buying bonds and make out reasonably well because spreads were so wide. But now, spreads have collapsed and yields on all those asset classes are at all-time lows.

Compared to the returns on a one- year treasury rolled over annually, the dividend yield on the S&P 500 beats it handily over the past 40+ years. In the past 10 years, there’s been a 40% increase in dividend income from the S&P500, even with the financial crisis, Michael reported.

You can potentially get a higher yield from the dividends paid by the stocks in the S&P 500 than from their 10- year bonds. All the growth potential and net dividends you can get for free. More current income, more future income higher short-term volatility, but lower in the long-term.