Right now, clients are demanding that we have their best interests in mind. And, that’s where it should be. Unfortunately, many consultants and outside counsel tell our industry that best interest translates to level fees and lower commissions. While you may be feeling the effects of leveled commissions, it’s no reason to stop growing your business.
Many commission-based products are well suited for clients in the retirement income planning space. And, there are some major demographic shifts taking place that will affect them over the next several decades. The proper combination of assets under management (fees), advice (advisory practice), and commissionable products can create best interest solutions for many Americans feeling the impact of these trends.
The Trend: Our savings rate has continued to fall over the last two generations. Today, the savings rate rests around 5.0-5.5 percent. We only see spikes in the savings rate during high inflationary periods or when we completely distrust Wall Street. The result, according to the LIMRA Fact Book, is that trailing baby boomers (age 50-59) have saved a median retirement account balance of $130,100.1
The Impact: You will have to generate more income with less assets than any planning generation before.
The Trend: Americans continually misuse our Social Security system. More than half of Americans take Social Security early – only 2 percent of men, and 4 percent of women, defer their income to age 70.2 That means nearly 98 percent of men and 96 percent of women are missing out on 8 percent guaranteed growth on their income between full retirement age and age 70. Over half the population takes their income earlier than full retirement age and elects to take as much as 25 percent less in income.
The Impact: You must provide solutions to bridge the gap of income and maximize social programs for your clients.
The Trend: Defined benefit pension plans are being replaced with defined contribution plans. The loss of guaranteed income in a retirement plan will prove devastating over long periods of time. Our research shows that retirement is optimized (95 percent probability of having at least $1 in the portfolio at age 95) with anywhere between 15-25 percent of the portfolio dedicated to producing guaranteed income.
The Impact: You must educate clients that guaranteed income can only come from Social Security, defined benefit pension plans and insurance company contracts (annuities).
The Trend: Longevity must be mitigated in order to have a successful retirement strategy. Our spending taper in the United States mirrors a smile more than anything else. Retirees tend to travel in early retirement followed by a slow down period of spending. At the end of life, there are health concerns, long-term care events, and housing elections that increase spending. It’s this final phase that is unpredictable, uncapped, and highly inflationary, making it difficult to address without proper planning.
The Impact: You must help your clients plan for longevity, or their spending smile will turn into a smirk very quickly.
All of the above are major shifts that are either taking place now, or will affect our business over the next several decades. You have to make sure you can address these issues in your planning practice, regardless of your business model (advisory or commissions). It will be critically important to do more with less assets, maximize Social Security, create guaranteed income streams, and take the longevity risk off the table. These risks can be mitigated with assets under management and complementary commission-based products. Plan differently to address the shifts that are taking place in America, and grow your business with solutions-based recommendations that include all products.
Plan differently to think differently in the future. There are major demographic shifts occurring in the United States that will affect planning over the next two decades. Get your arms around them now to stay above the crowd in the future.
1LIMRA, Fact Book on Retirement Income 2016: https://www.limra.com/bookstore/item_details.aspx?sku=23518-001
2The Motley Fool, “When Does the Average American Start Collecting Social Security?” April 19, 2016: https://www.fool.com/retirement/general/2016/04/19/when-does-the-average-american-start-collecting-so.aspx
Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”
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