Advisors Shifting to Active Management of Retirement Income

April 26, 2012

By Linda Koco

ORLANDO – More and more financial advisors are focusing their practices on actively managing for retirement income, according to the new president of Prudential Annuities. He characterized the change as a “fairly dramatic shift” from focusing primarily on accumulating a nest egg,

Speaking at the annual Retirement Income Conference, Prudential’s Robert F. O’Donnell repeatedly stressed that retirement entails many complexities and that industry advisors and providers need to factor those complexities into their planning and solutions. The conference was co-sponsored by LIMRA, LOMA and Society of Actuaries.

The growing awareness about retirement complexities provides the “best argument” for the annual checkups that he said the best financial advisors have been recommending for years.

“The need is greater than ever to the investors to pause periodically and examine their retirement picture,” he added.

Awareness of retirement complexities is also influencing what advisors do at those regular client meetings, he indicated.

For instance, advisors are not only asking questions like, “what has happened to your investments since we last met?” and “have your needs, objectives and tolerance for risk changed?” but they are also honing in on retirement income issues.

Interwoven factors

“The disparate and often interwoven nature of variables like genetics, choice and change ... are factors that impact our lives from birth and onward,” O’Donnell pointed out in discussing the nature of the complexities with which retirement professionals must deal.   

Life is actually “quite stochastic in nature,” he said. For instance, retirement situations differ between men and women, between those in different socio-economic groups and between those in different cultural groups. Even whether a person retires after a strong market upturn or not can impact a person’s retirement finances.

Longevity is another factor. People are not only living longer, but the gap between male and female longevity is closing. Social Security data shows that men now live four years longer than they did in 1980 and women, two years longer, O’Donnell said.

Living longer is supposed to be a “happy thing,” he commented at one point, but it also “significantly increases” the tail risk inherent in life — and retirement. It increases the potential for adverse effects on a person’s financial position, and leads to a higher risk of outliving retirement savings as economic downturns, health problems and inflation take their toll, he said.

Makes the head spin

“That is enough to make our heads spin,” O’Donnell continued. “But just imagine what it is like for individuals. Or imagine what it is like for financial advisors whose job it is to help investors navigate through the retirement planning process.”

The shift in retirement income focus that financial advisors are making results in part from new research, O’Donnell pointed out.

For instance, researchers are finding that today’s economy has dispelled the “myth of the old 4 percent rule,” he noted.

[Many advisors have used that rule of thumb as a way to guide clients on how much money they can withdraw from their accounts each year -- 4 percent, adjusted for inflation — without running the risk of outliving their assets. Now, some advisors are going lower, or avoiding reliance on such a rule.]

In addition, researchers and advisors have realized that helping investors decumulate (spend down) their assets during retirement is “at least as important as helping pre-retirees build up their next egg,” O’Donnell said.

That is leading advisors to consider reverse dollar cost averaging or the idea that, in the decumulation phase of life, “the same positive effects of traditional dollar cost averaging can play out in reverse.”

The fact that researchers and financial advisors are paying so much attention to the decumulation phase of life is a “real shift in focus,” the executive summed up.

Get it right

O’Donnell also addressed many remarks to retirement income providers. In view of all the complexities that retirement presents, providers need to examine their budget for risk as they design products for longevity, he said.

“Getting it right for large populations is essential,” he said.

Where longevity risk and capital market risk are concerned, the industry has expertise, he indicated. But providers do face challenges when it comes to accounting for client behavior.

Client behavior “varies from sound and rational to seemingly irrational,” he cautioned, and it is affected by choices and chance events experienced over a lifetime. Questions concerning lapse rates, withdrawals and taking income later in life also come into play.

All of this can have significant consequences for designing products and managing the associated risks, O’Donnell said.  Still, he urged providers to avoid “small caliber thinking” as they develop solutions. Small caliber thinking leads to small caliber solutions, he explained.

The industry needs to “make the complexities of today’s retirement world work for us instead of constraining us.”

He called for innovative, evolutionary approaches that will be great for consumers, appealing for financial professionals, while still protecting shareholder interests.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].





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