Investor misfortune is a good thing — at least for financial advisors trolling for new clients. The industry now sits on the cusp of perhaps the best illustration of that statement, as the mythical $41 trillion wealth transfer to baby boomers from their parents starts to reveal itself as just that — a myth. (See this month's cover story, page 34.)
Those who were basing their retirement plans on incorrect assumptions about how much they would inherit are likely to be in urgent need of financial guidance.
Indeed, even those baby boomers who have socked away significant dollars are showing themselves to be woefully unprepared for retirement, and as this demographic slouches towards 65, virtually any advisor could make a fine business from focusing on these most needy of clients.
What follows is a checklist for advisors who want to make baby boomers a centerpiece of their practices. (The Phoenix Investment Partners reports referenced below are accessible through the author, who can be reached at firstname.lastname@example.org.)
Understand the Challenge (and the Opportunity).
The first step to serving underplanned boomers is to appreciate the depth of the problems facing them. The underlying forces driving the retirement-savings crisis are demographic and political, and they are getting worse.
One book that can help an advisor become an instant authority on such matters is Running on Empty (2004, Farrar, Straus & Giroux) by Pete Peterson, former U.S. Secretary of Commerce and chairman of Wall Street powerhouse The Blackstone Group. Peterson doesn't mince words, and he marshals a wealth of sobering statistics to support his assertions (see story on page 60). The book details how Federal safety nets, such as Social Security, Medicare and Medicaid, are fraying. He does some exploration of how we arrived at this point (faulting both major political parties), but concerns himself largely with what needs to change. His forecast for the future is dire, unless some immediate and dramatic corrective action commences soon.
The book is a great starting point for an advisor — and it can also help in-denial clients understand the depth of the troubles they face.
Act Like an Institution.
To become a retirement-planning expert, advisors first need the stability of a process. The No. 1 reason millionaire households go shopping for new advisors is that they don't like their current advisor's strategies. Process brings consistency and credibility, and one of the best ways to attain this is to emulate the best retirement planners in the country — institutions.
A Phoenix report, “Act Like an Institution,” outlines the way America's largest and most responsible investors — corporate and public pension funds, endowments and foundations — approach investing. It also highlights what a difficult time investors have had over the last two decades or so.
Specifically, it details how the average equity investor garnered average annual returns of 2.57 percent between 1984 and 2002 — performance that lagged the annual inflation number of 3.14 percent. Meanwhile, annual returns for institutions over the last 10 years approached 10 percent.
The difference between individual and institutional approaches to investing boils down to process. Institutions adhere to strict allocation and diversification models (which are detailed in the report). An advisor who can present such process to a client — particularly a client who has fared poorly in managing his own retirement funds — has a leg up in acquiring the business.
Protect the Wealth.
Retirement-planning experts must prepare pre-retirees for retirement realities. The primary coaching challenge on this account is to convince clients to adhere to the investment solution that has been designed for their assets. This is no small matter, since clients often want to play around with their investments in a quest to best the indexes by timing the market. One way to help clients fight this urge is to point them to the “other” side of the retirement balance sheet — liabilities and risks.
Of course, even the most market-savvy millionaires go a little deaf when their advisors mention the potential for disability, premature death or the looming costs of retirement health care. But preparing a client for the unexpected can mean the difference between his comfortable retirement and a family disaster. The advisor who drives this point home to the client becomes a hero.
A great tool for doing so is Phoenix's “Wealth Planning Overview,” a single page graphic with the five comprehensive areas of risk for millionaire (and any other) households: Retirement Planning, Estate Planning, Income Protection, Assisting Children and Assisting Parents.
One longtime advisor friend uses the overview to locate the lurking “family problem” that all clans seem to harbor. Of course, the overview is not a substitute for comprehensive financial planning, but it does help an advisor to focus both prospects and clients on their most fundamental needs.
The overview is most potent when used in conjunction with the “Future Shock Worksheet,” which essentially lays out for the client at what point in life he can expect to confront large financial decisions — such as sending a child to college or funding a nursing home for a parent.
The worksheet was a gift from a minister who counseled newly engaged couples about the facts of married life; he needed a way to show them the realities of the road ahead, without sounding preachy. Advisors, of course, face the same challenge, and the most common result of an overview session is to show the collision of needs at retirement age. It can be quite a shock indeed — but it's often just what the client needs to make the right moves.
Make a Plan
A real plan — not the one wished up during a branch manager's last tirade. How many people will you target to have real conversations about their future? How many per day, per week, per month? Specific numeric goals have the same disciplinary effect on you as they have on your clients — consider them your personal benchmark. Set a goal to have two new conversations about retirement each day.
Start right away to show both clients and prospects your new retirement expert focus. Begin by scheduling appointments with your client households to discuss the wealth-planning overview (what could go wrong) and have each complete the “Future Shock” worksheet. There's no time like the present to show your best clients your commitment. After the first three meetings, you will have a better understanding of even long-term clients, and they will have a better appreciation of you.
Keep on Keepin' on
It's not easy to advise people to save when peers, friends and colleagues are spending and spending some more. But your job is to mentally adjust to the role you have assumed, which means understanding first that you have your work cut out for you. Most people will consider you a pest, even an alarmist. Some may think you're too negative. Strike a balance by showing your passion for the challenge of achieving a comfortable retirement. Maintain a “can-do” attitude and even the bad news will sound manageable. Remember that most millionaires are positive people and when they hear the bad news, they want to know the plan to achieve success.
Maintain High Ethical Standards
Don't let yourself be taken off course by clients and prospects who blame you for their need to save more or change their lifestyle. Don't allow them to take on more risk than they can afford. Remember the lessons you learned from tumbles in both stock and bond markets and deliver those lessons to your hopeful but naïve clientele. The most tragic investing calamities are repeated by clients who should know better and by advisors who did know better and let the clients get in trouble anyway.
Just Say No
Not everyone will appreciate a long-looking approach to financial planning, but the good news is that the market is full of juicy prospects. The United States is home to 6.5 million millionaire households — 80 percent of which do not have adequate assets to retire in comfort.
Given these facts, there is no reason to spend extra time trying to create a plan for someone in obvious, deep-seated denial of their lack of savings relative to their family expenses. Like a doctor, you can make a diagnosis and prescribe a treatment, but you can't make people take their pills. Since most of your compensation results from treatments, you can waste a lot of time and effort diagnosing and prescribing to a lost cause. Be gentle but be clear to those lost-cause types that they are not ready to take on the challenge and that you hope to see them again when the timing is better.
They'll get the message and — with luck — will tell others.
Steve Gresham is an executive vice president at Phoenix Investment Partners, where he oversees sales and marketing in the firm's private client group.