Retirement Portfolios Need Closer Monitoring Than Ever

By Amy McIIwain, President, Financial Social Media on Wednesday, June 20th, 2012

Baby Boom clients still require active investment advice in the new retirement landscape. The challenges they face today still represent huge opportunities for advisors willing to work longer and harder.

Now that Baby Boomers are hitting retirement age at the rate of 10,000 people a day, the moment the industry pundits promised us a decade ago is here.

It was supposed to be the biggest transfer of wealth in history, not to mention the payoff for advisors who’d spent decades nourishing their accounts and could now hit cruise control alongside their clients.

Unfortunately, two recessions and several wars have left today’s retirees in a more precarious position than the pundits predicted.

“Millions of Americans have been hung by pure bad luck in the timing of market losses,” says David Macchia, founder of retirement income solutions company Wealth2K.

You probably know the drill. The typical employer-sponsored retirement account lost 14% of its accumulated value in 2008, with worse losses higher up the net worth chain.

While those who stayed the course managed to recover, the rebound still left once-solid retirement plans looking a little dented. 

Time to get on board the demographic bus

Even those in good shape are probably going overboard pulling back from risk in order to prevent another disaster.

That’s where your heavy lifting starts. Rock-bottom interest rates are unlikely to budge for at least the next two years, while medical research keeps pushing life expectancies out far beyond 70 for men and women alike.

As a result, stocks and other relatively volatile assets simply need to stay in the portfolio for longer periods of time.

But while this looks like an extended accumulation phase on the surface, generating reliable current income at the same time can get complicated.

“Advisors have a long way to go to catch up,” Macchia says. “They have to fundamentally restructure the way they allocate investment assets.”

“In the distribution phase, you have to put in protections, hedge risk, have elements in the strategy that provide predictable if not guaranteed income. It’s more complex but also a higher-stakes business opportunity.”

Advisors who can establish themselves as experts in this separate field can woo retiring accounts away from more traditionally accumulation-centric competitors -- who may in turn need to move down the generational line simply to replenish their books.

Unless you’re eager to start courting Generation Y, now’s the time to reinforce the notion that you add value well beyond age 65.

Naturally, that’s more than just adding “retirement advisor” to your business cards.

Funding your clients’ bucket list

Macchia warns that getting the most out of the nest egg requires an unusually intimate knowledge of client finances in order to make sure spending lines up with income.

 “It gets into family structure, budgeting, et cetera,” he says. “Retirement income planning is not done in isolation, but is done across the depth and breadth of a client’s financial life.”

To monitor your retired clients’ accounts at that level of detail -- much less manage the IRAs effectively -- you’ll need to see more than what your own quarterly statements reveal.

“If you are only looking at a sliver, you are going to make decisions that are sub-optimal,” Macchia explains.

He suggests some form of account aggregation software to integrate cash, taxable and tax-advantaged portfolios into a single top-down view.

As to how to structure those portfolios, annuities may be an easy way to start but inflation-protected bonds, dividend-paying stocks and other vehicles can help feed the income hole.

Macchia’s a fan of the bucket approach, which allocates assets to fill various cash flow needs from immediate living expenses on out to more optional or long-term planning goals. He also believes that for certain investors, those who most need to protect their capacity to meet essential living expenses,  advisors should construct retirement income investing strategies that include an appropriate level of lifetime guaranteed retirement income.

The essentials can’t be tampered with and can’t survive risk. Think truly guaranteed investments like annuities or the traditional CD ladder here.

“Augmented” or “enhanced” products that promise no risk and higher returns get into dicier territory, but remain popular despite their role in destroying several brokerage firms over the last few years.

But for advisors who can actually find the income without taking on excessive risk, retirement isn’t the end of the world.

It’s only the beginning of a hopefully long period of time when the clients can relax and the checks keep coming for everyone.

Scott Martin is the Senior Editor of theTrustAdvisor.com America’s leading wealth management e-newsletter and has been tracking various aspects of the financial industry since 2001 for publications like Research, Buyside and Institutional Investor. Previously, he was a market writer for CNN. As an advocate for the trust industry, he has testified to the Nevada Senate Committee on Commerce, Labor and Energy on issues of national competition. He is also active as a marketing and editorial consultant for registered investment advisors.

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