by Carolyn EllisMs. Ellis is Features Editor, L&HA e-newsLink and Advisor Magazine. Connect with her by e-mail: [email protected] Ed Friderici is Managing Director of Saybrus Partners, Inc., a subsidiary of The Phoenix Companies. With 25 years of experience in financial services first in investments and currently in annuities, he has grown increasingly committed to the importance of protection products in a retirement portfolio. On a personal level and from his industry-wide perspective, Friderici observes wryly that intelligent, well-intentioned investors and pre-retirees often make ill-advised decisions about their retirement savings. His observations point to a not-to-be-missed opportunity for advisors and agents.
L&HA: You have said that investors behave badly when it comes to managing their investments. What do you mean by “bad behaviors?”
EF: On the investment side, bad behaviors include buying high, selling low, and chasing the hot dot. A lot of folks don’t work with advisors and don’t have a plan. They don’t do follow-up and rebalancing. They’re acting more on emotion than intellect, and they fall subject to herd mentality.
L&HA: The Boomers and retirees who behave “badly” are hardworking folks who want to be responsible about saving for retirement. What else could be affecting them?
EF: There’s a phenomenon called the recency effect, which means essentially that what you’ve most currently experienced, you project into the future. Because the market, although volatile, has hit new highs, people have forgotten about the two significant bear markets they’ve experienced. If you recall, these are the Boomers who had the pool drained on them twice in the last 12 – 13 years.
Let’s look at some of their behavior as it relates to rollovers. LIMRA reports that as of 2012 there was about $400 billion in IRA rollovers. Despite two significant bear markets, 78 percent of those rollover assets are in mutual funds, individual stocks, ETFs, or managed accounts. In other words, assets that are exposed to the market. People seem to have forgotten about the pain that they experienced.
The other side of the coin is people who are paralyzed, who are overly sensitive to those bear markets. Fourteen percent of those rollover assets are in savings accounts, checking accounts, or money market funds, and earning north of zero. Now, is that the right thing to do? Probably not.
L&HA: When you say pre-retirees, what ages do you mean?
EF: I’m targeting folks ages 50 – 70. One of the things we need to consider is, when is volatility your friend? That depends on how much in assets you have amassed for retirement and how close you are to retiring. If you’re 50 and planning to retire at 55, that’s a whole different picture from somebody who’s 50 and planning to retire at 70 and work part time along the way.
L&HA: While retirees have more flexibility and more choices, there seem to be patterns in how we behave.
EF: When I joined the financial services industry in the ‘80s, one explanation for investors’ behavior was greed and fear. When the market’s doing well, people think, “I want a piece of that.” They may over-emphasize certain allocations to risky market-based investments in lieu of being protected. When the market’s down, people get fearful and sell at the bottom and start moving into money markets or annuities. Timing is a key detriment to consumers’ investing and retirement success.
L&HA: Annuities could be the answer for many retirees.
EF: Yes, but I would take a consultative, balanced approach. Say you’re a couple years away from retiring and the market’s hit record highs. It’s contrarian behavior to start selling, when something’s doing so well. Consumers have to look at when is the best time to add protection in the form of an annuity. When your account is at a record high? That sets all the baselines for your income, rollups, and premium bonuses. Is it better to start pulling some chips off the table at that point or when you’re in the midst of a bear market and you’re down 40 already? It’s a really tough behavior to break.
L&HA: How important is education or being advised
by a professional?
EF: Folks who are working with an investment professional or a financial professional are two times as likely to report being prepared for retirement. If we look at the pre-retiree Boomer population, only one in seven has a written plan that goes through the most basic, “What are my expenses going to be? What is my income going to be in retirement?” This is a tremendous opportunity for advisors and agents.
L&HA: You make a great case for protection as the
counterweight in every healthy portfolio.
EF: The one thing that I go back to is having a four-corner approach. These four are accumulation and protection (this could be life insurance or enhanced death benefits on the annuity side), income, legacy needs, and finally personal care (things related to nursing home or home health care). There’s product out there that can offer exposure to the upside with protection from extreme volatility on the downside.
L&HA: What segment of the market are we targeting?
EF: Folks in the middle market have to get a pretty big bang out of their buck. Maybe they don’t have a pension and everything is locked into their 401K, 403b or Federal Thrift Plan. These accounts can be in the $20,000- $50,000 range, but we have also cases in the $3- $4 million range. Regardless of household income, there’s a need for product with protection.
Clients with higher income might not need accumulation, but their goal is to dial in a combo product that offers income, nursing home care, and enhanced death benefit. Or maybe they want to transition what they’ve amassed into guaranteed lifetime income. Consumers in the middle market might need all three: accumulation, protection, and income.
L&HA: Are tried-and-true products meeting these needs
or new ones?
EF: Tried-and-true products including bonus products continue to meet many retirees’ needs. We’re also getting good traction with new products that focus on accumulation and guaranteed income and, one of our fastest growing, a combo product with three forms of protection: income, personal care, and family care. For the middle market person who may not have the financial wherewithal to get sophisticated with investment, insurance, and annuity options, one product with the ability to dial in the right features is attractive.
L&HA: Baby Boomers are reinventing retirement. What impact is this having on how financial planners market and serve consumers?
EF: It goes back to taking a consultative approach. Our retirement analysis software called Realize allows agents to educate clients about risk. It could be market risk or policy risk. This software enables advisors or agents to dial in education with data collection and discovery. You really get into the weeds as to what their expenses, retirement income with pension and Social Security, and assets will be. What are their fears? Are they concerned about inflation? You’re collecting their hopes and dreams plus the facts. After that you can make a product recommendation.
L&HA: Are there new trends in marketing to meet the needs
of today’s retirees?
EF: Social Security planning is a popular topic for client seminars. And we’re seeing advancements in how clients are invited to seminars – a combination of mail and digital marketing including agent web or landing pages. With all the new tools and techniques agents can do the right thing by way of the client. But it’s also a way to distinguish themselves which will help build their market share.