Advising Everyday Boomers

Developing client opportunities in the middle market

by Scott L. Goldberg

It is old news to say that Baby Boomers are reshaping the rules of retirement, but the extent to which it is changing is just beginning to be fully appreciated.

Over the course of a generation, retirement has morphed from being a staid period of quiet contentment to something better described as a new stage of life. It promises to be filled with new experiences, new relationships, new hobbies, and possibly even a new career.

From a financial perspective, the economic equation behind retirement has changed, too. Depending on your health, assets, and income, the task of financing your retirement can be the ultimate wildcard as it has the potential to be longer, costlier, and more financially uncertain than at any time before.

The First ‘DC’ Generation

Not long ago, retiring Americans could count on employers to provide post-employment income for as long as they – or a spouse – would live. Today, fewer than 30% of private employers continue to offer a “defined benefit” pension plan.

Most have been replaced by “defined contribution” plans as institutional support has given way to an era of personal retirement accounts. Boomers are among the first to experience the effect of this transition. When they separate from their employers, most will not have the benefit of continuing income. Of course, fewer Americans spend the bulk of their careers with a single employer, so it makes sense for people to have access to portable retirement assets.

But, unlike traditional pension plans, defined contributions plans offer no guarantee as to their performance. There is no promise that their value will persist for your lifetime, be able to withstand a downturn in the market, or keep pace with inflation. This transition from pensions to 401(k) plans is really a shift in responsibility as to who is in charge of managing the preservation, growth, and distribution of your retirement benefits. Employers used to take this on. Now it is the work of each individual.

Singular Generational Challenges

• Without exaggeration, the financial challenges confronting aging Boomers, the nearly 80 million Americans born between 1946 and 1964, are larger and more complex than what previous generations ever had to face.
• People are living longer. According to the Social Security administration, since 1940, the life expectancy of a 65 year-old is up about 30% while the average age of retirement has only moved up slightly.
• Most employers, in addition to eliminating pension plans, have dismantled their retiree health programs. Twenty-five years ago, about two-thirds of corporations gave their retirees access to health benefits; today, based on an Employee Health Benefits study by the Kaiser Family Foundation, only about one-quarter of companies do.
• The cost of healthcare during retirement is larger than what many people have saved. According to a study by Fidelity, a 65-year-old couple (with the benefit of Medicare coverage) requires about $220,000 in savings at retirement to cover expected hospital, physician, and drug costs.
• The number of people living with chronic diseases, such as heart disease, cancer, and Alzheimer’s disease has increased rapidly and is highly correlated with age. Roughly 86% of U.S. adults over 65 years old have at least one chronic condition.
• Interest rates, which following the recession were purposefully held low, are now likely to remain “low for long” due to further economic woes.
• Equity markets, which are capable of producing higher rates of return, are as volatile as any time in history. Not only are stocks more likely to make a large price swing in a single day, but since the turn of the millennium the entire market has shown how quickly a correction can wipe out value.

Where are the advisors?

Given the circumstances, you would expect most individuals, particularly those with modest incomes, to be in close contact with financial professionals. But, according to a recent study conducted by the Bankers Life Center for a Secure Retirement, the facts on the ground are much different.

Approximately 60% of “middle-income” Boomers – those with less than $100,000 in annual income and age 50 to 68 – are not receiving professional financial guidance of any kind. It appears as though a greater percentage of these individuals are using a professional to wash their car or cut their hair than provide them with retirement financial advice.

Now, wait a second. How can the challenge of achieving financial security during retirement be greater than ever, yet most middle class Boomers are preparing to navigate through their experience without any expert assistance? Among those surveyed, the most common reason for not working with a financial professional is that they can make their own investment decisions.

But over 80% have not received any specialized training or education on topics related to retirement financial security. Most rate themselves as not being confident in their retirement savings. Nearly half are not investing in mutual funds, a mainstay of most retirement accounts. Only about one-third has a current will, living will, or healthcare power of attorney.

And as financial professionals know, without proper guidance, individual investors typically struggle to make good planning decisions. They buy high and sell low, take an inappropriate amount of risk in their portfolios, overlook basic deal-related due diligence, underestimate their healthcare expenses, create unsustainable spending patterns, misjudge their longevity, and so on.

Actually, the real reason that these individuals are not working with financial professionals is because advisors are not contacting them. Most financial professionals are careful to avoid middle class households.

Of those individuals who are not working with a financial professional, 85% indicate that, over the past year, not a single advisor has contacted them, and 63% state that an advisor has never contacted them. Meanwhile, 25% of those who are working with a financial professional had to seek out that professional on their own – many times by literally showing up at his or her office.

Persistence… for some

If you are familiar with the financial advisor industry, you might not be surprised. Independent financial professionals have long preferred to service the affluent market where client accounts can be more lucrative.

Surely, when fees are charged as a percentage of assets under management, it is easy to see why. Middle-income Boomers may be in need of advice, but 70% of those who are not working with a financial professional have investable assets of less than $100,000.

So if traditional advisors are content to overlook this population, who will provide financial solutions to millions of Americans who are poised to enter the distribution phase of their retirement and could greatly benefit from professional advice?

Here is an answer: Three-quarters of these same middle-income Boomers rely on a professional to assist them with making informed insurance decisions. In other words, this population may not be working with financial advisors, but they do work with insurance agents. With so many of these individuals needing a combination of insurance and investment advice to protect, grow and distribute their assets throughout retirement, there is a compelling case for “middle market” insurance agents to transition also and become registered to provide investment advice.

Those who specialize in life and annuities may not have a choice. Several states have made it clear that non-registered insurance agents cannot recommend the purchase of a fixed insurance product when the source of funds is coming from the sale of a security. Providing investment advisory services to middle-income Boomers brings its share of complications.

Unlike the young or affluent that may be attracted to technology-enabled solutions, this segment prefers face-to-face interaction. That can be difficult to scale when account values are modest. But those who do figure it out will benefit from connecting with an underserved segment that is in great need of professional advice. And, for now, has few advisors calling. ♦