An advisor’s guide to protecting clients’ financial futures
by Craig HawleyMr. Hawley is head of Nationwide’s Annuity Distribution, and a regular contributor to our pages.
In the next decade, the last Baby Boomers will reach retirement age—meaning that roughly 20% of all residents in the United States will be 65 or older by 2030, according to a US Census report. This is a pivotal moment for our country’s population, especially when we consider the fact that just 13% were aged 65 or older in 2010, and less than 10% were aged 65 or older in 1970.
Planning for retirement today requires a different blueprint than in years past, considering market volatility, the rising cost of living and the exorbitant cost of health care, along with longer lifespans, disappearing pensions, and the shrinking Social Security safety net. Our fifth annual Advisor Authority study of roughly 1,600 Registered Investment Advisors (RIAs), fee-based advisors and individual investors found that many of these challenges are pushing investors to pursue professional advice.
Navigating Uncertainty with Holistic Planning
More than half of all investors (54%) say that market volatility would increase the likelihood that they will work with a financial advisor.
This is especially true among High Net Worth (HNW) investors, with investable financial assets ranging from $1 million to less than $5 million, and Ultra HNW investors with investible financial assets of $5 million or more. Nearly six in ten HNW investors and more than two-thirds of Ultra HNW investors say market volatility will increase their likelihood of working with an advisor.
You have an opportunity to build your business by helping clients navigate this uncertainty with holistic financial planning. This includes a move away from basic asset management, to specializing in tax planning, estate planning and risk management, including the skillful use of insurance solutions. And as a new category of fee-based insurance continues to expand, more RIAs and fee-based advisors can also incorporate a range of protection solutions into their comprehensive approach to retirement planning. Identifying the right solutions requires a deep understanding of specific investor concerns and needs, coupled with a clear commitment to offering personalized and unbiased advice.
Investors Less Optimistic Year-Over-Year—Even the More Affluent
Investors’ financial outlook is considerably less optimistic than in 2018—and they expect uncertainty to persist.
Mass affluent investors, with $100,000 to less than $500,000 in investable financial assets, say their financial outlook declined eight percentage points, to 52% in 2019 from 60% in 2018. More surprisingly, optimism among HNW investors fell a full ten percentage points, to 55% in 2019 from 65% in 2018. Among the investors in our study, only the Ultra HNW were more optimistic in 2019 than in 2018.
Overall, the majority of investors expect market volatility to increase (66%), are concerned about a recession (58%) and concerned about a possible bear market (54%). Their declining outlook may also be related to their top three financial concerns. Specifically: Mass affluent investors are most concerned about taxes by a wide margin (38%), protecting assets second (29%), and saving enough for retirement third (28%). The HNW and Ultra High Net Worth cite taxes first (38% and 34%, respectively), protecting assets a close second (37% and 33%), and the cost of healthcare at a distant third (27% and 19%).
Protecting Against Outliving Savings—and Protecting Retirement Income
Part of the concern for protecting assets is likely related to protecting against outliving retirement savings and generating reliable income in retirement.
While our Advisor Authority study found that mass affluent investors are twice as likely as the HNW and Ultra HNW to say that saving for retirement is a top financial concern, all three groups are equally likely to say that generating reliable income during retirement is a top financial concern.
Still, one-fifth of all investors do not have a strategy in place to protect against outliving their savings. Two-thirds of mass affluent investors (66%), more than three-fourths of HNW investors (77%) and nearly two-thirds of Ultra HNW investors (65%) still rely on Social Security as the number-one solution to protect themselves against outliving savings. More concerning, nearly half of mass affluent investors (45%), more than one-fourth of HNW investors (28%) and one-in-ten Ultra HNW investors (10%) don’t know or are not sure which solutions they should use for generating retirement income during periods of market volatility.
You have a real opportunity to help clients meet the retirement income challenge head-on by incorporating protection solutions that can help address broader financial concerns—and fill the retirement readiness gap at different stages of the financial lifecycle and at every level of every net worth.
Ready to Insure Their Financial Future?
Many of your clients will face a retirement that could last more than 30 years—so it’s worth asking them: You’ll insure your home and you’ll insure your car in 2020. Are you prepared to insure your financial future?
As part of a client’s holistic financial plan, annuities are one of the only products that can offer additional protection by providing guaranteed income for life. They can be an effective option for clients who need ‘income now,’ by using an immediate annuity while they await full retirement age to begin Social Security withdrawals. They can provide ‘income later,’ for clients who use a variable annuity to maximize tax-deferred accumulation with downside protection before turning on their ‘income spigot.’
In fact, RIAs and fee-based advisors are using variable annuities (VAs) with living benefits to protect clients against outliving their savings. It is their top solution, after Social Security, according to our Advisor Authority study. Yet, just 32% of investors use a VA with a living benefit to help protect against outliving their savings and only 12% percent use a single premium immediate annuity (SPIA).
The opportunity, here, is to educate clients about the different types of annuities—including fixed, variable and indexed, and the associated payout structures, like immediate or deferred. There are annuities that generate income through annuitization, and others that generate income through living benefits, while offering a range of insurance guarantees like spousal protection, death benefits, and liquidity features.
Helping clients understand that when they choose an annuity, they don’t give up control over their assets, is critical. It’s not all or nothing. They can allocate a portion of assets to an annuity. With a guaranteed income floor in one part of the portfolio, they have the flexibility to invest the rest more aggressively—whether it’s for greater growth potential, greater liquidity or to pass along to heirs. Using an annuity as a complement to a bond laddering strategy can increase the certainty of meeting a client’s income needs. By protecting against longevity with a guaranteed income stream for life, it may help ensure that a client is not a financial burden on a spouse, their children or other family members.
Protecting the Big Picture
The decision to invest in an annuity needs to be part of a strategic and holistic plan, so clients can protect their income in retirement and ensure that they don’t outlive their savings.
It starts with understanding clients’ specific needs and priorities—from accumulation, to generating income to leaving a legacy. Second, it’s important to consider how annuities will fit with other sources of income, such as Social Security, qualified retirement accounts and other investments such as stocks, bonds and mutual funds.
When asked what would make them more likely to work with a financial advisor, investors consistently say years of experience, personalized advice for a holistic financial picture and a fiduciary standard are among the top three. Be proactive and reach clients as early as possible to discuss your approach to holistic planning—and serving their best interest—when taking on the retirement income challenge. There is no better time than now to start helping your clients prepare for and live in retirement, to protect themselves, their family and their financial futures.