When individuals retire, they make big changes. One big change they should generally avoid is switching financial advisors. Because of the relationship created prior to retirement, the advisor knows where the retiree stands financially and understands where the retiree wants to go. Continuity is important during this major life stage.
Avoiding the loss of a client at retirement requires planning. Advisors should anticipate several common issues prospective retirees will grapple with at the time of retirement and take steps to avoid having these issues lead to being fired.
It’s common for the client to struggle at retirement with emotion, location, and allocation. Additionally, in helping the client with these concerns, the advisor may also have to deal with the challenge of compensation. Addressing these issues in advance can lead to a smooth transition in the advisor/client relationship.
A closer look
At the moment of retirement, it’s not uncommon for a retiree to experience panic or even depression. The panic occurs when the retiree realizes their financial situation suddenly changed from net income to net outflow. They’re not receiving checks; they’re writing them. They’re not accumulating wealth; they’re decumulating a portfolio.
Depression may occur because their daily routine is radically altered, and their self-image suffers. They may also be thrown off by the sheer complexity of retiring. They must decide when to file for Social Security, choose among a host of Medicare options, and determine how to handle their personal and work retirement accounts. It’s a lot to take in, and without good advice it can lead to inertia, kneejerk reactions, and misguided decisions.
Some retirees plan to stay put at home — often called “retire in place.” Others see using their newfound freedom to change residences, whether in town or in a new locale. They want to move to play golf, be nearer the grandchildren, or experience a new lifestyle. Some want to become snowbirds, or even take to the road with an RV. And for other retirees, either their finances or their health necessitates downsizing from their current residence.
Selling an existing residence and buying (or adding) a new place to live is complicated. In addition to all the real-estate challenges and physical demands of moving, retirees must also consider the finances of arranging a move and the tax implications. Further, there are the practical considerations of how to manage finances after the move, particularly if the move is out of state. Examples include remotely managing government benefits, decumulating their portfolio, monitoring expenses and even handling mail. This process can run significantly smoother if the issues are identified and a plan is in place before retiring and before moving.
We are living in a defined contribution world, and that means retirees now have far more of a burden upon them to get their finances right. Not only do they need to get an appropriate mix of risk and return in their retirement portfolio, but they also need to locate the right financial assets in the right accounts —whether after-tax investments, tax-deferred IRAs and annuities, or tax-free Roth IRAs and municipal bonds.
Your clients will need to figure out how to draw down the assets in these accounts into sustainable monthly income. All this involves different budgeting, changed tax strategies, and new software tools for managing retirement wealth.
Both at retirement and in retirement, people need advice. For many, this advice will well exceed what they can cobble together as a DIY project or what they might find by exploring cookie-cutter solutions on the internet. While professional advisors can provide this support, they need to receive adequate payment for their services. However, retired clients often buy fewer products and their investment portfolios decumulate over time. As a result, commissions and wrap fees may no longer provide an adequate level of advisor compensation.
How to address the four retirement challenges
The advisor who works with retirees should not be just a financial advisor, but also a retirement planner. The client has gone through a major life stage and has different financial and psychological needs. The advisor should be able to address and deal with these needs or refer the client to someone who will. What won’t work is abandoning the client.
Clients who are retiring can be a highly valuable source of business and referrals. To earn the right to continue representing these clients, you as an advisor should be prepared to address the four retirement challenges discussed above.
Most retirees are facing retirement for the first time and don’t know what to expect. By helping them understand the possible range of emotions they may experience, you can arm them for this challenge. Help them envision retirement — what they’ll do both on Day 1 and after. Encourage them to document their plans and be a third-party reality check for them. They may need a nudge from you to understand that golfing every day is not the be-all and end-all of retirement living.
Bracing prospective retirees for the challenges of dealing with Social Security and Medicare is key. As they approach age 65, they’ll be assaulted with myriad Medicare offers, many of which are grossly inappropriate. If you’re not there to counsel them, they may file for Social Security far earlier than what’s financially appropriate for them.
Another difficult client discussion revolves around diminished capacity. While clients are eager about their upcoming retirement and you don’t want to burst their bubble, it’s important to encourage them to plan now for future challenges to their physical and mental capabilities. Remind them that this kind of planning helps them control their destiny rather than have it foisted on them when incapacitated.
With modern technology there is no reason to lose a client simply because they have moved. However, this requires you to set up your practice to work remotely with clients. And realistically, you may have to provide some upfront tech assistance to your aging clients.
More importantly, you can help your clients understand the challenges and opportunities of moving, whether it’s downsizing, going to a retirement community or something more exotic. The decisions they make here — particularly financing issues such as reverse mortgages, buy versus rent, and sale-leasebacks — will affect the rest of their retirement income plan. And since tax issues often come up with a change of residence, you should also be prepared to provide clients with accurate answers.
This may sound overwhelming, but you don’t have to go it alone. As a financial advisor, you can serve as a concierge and connect your clients to reliable local and national sources for information on moving. The National Council on Aging, AARP, reverse mortgage specialists and local senior services offices are some sources to turn to.
This is an area that distinguishes a retirement planner from a financial planner.
Much of financial planning for working individuals focuses on wealth accumulation. Financial software uses various modeling techniques to estimate retirement outcomes. Monte Carlo simulations can help assess the likelihood of a portfolio being sufficient to fulfill retirement income goals, and that information leads to pre-retirement investment strategies.
However, once your client retires, the focus moves from planning for retirement to executing in retirement. They need help with decumulating their portfolio, setting up an income withdrawal strategy, and incorporating tax, Social Security and Medicare rules into their plans. Implementation of these strategies often requires the use of software specifically tailored to retirees. You will need tools to facilitate your client’s income strategy, update results, stress test the portfolio, and modify as needed to reflect economic conditions and client health changes. Some advisors even include cash flow management services as part of their support for retirees.
As an advisor, consider adjusting how you’ll be compensated for your services. While the retiree market can be profitable both personally and financially, it can also be time consuming. It is not wise to front-load compensation (make your money while the client is working and then offer post-retirement support as an accommodation). This is a recipe for discord between advisor and client: You see it as doing a favor and your client sees it as an obligation.
Rather, address upfront how you will be compensated for your post-retirement service. As mentioned earlier, product commissions and wrap fees may not be satisfactory remuneration since the client’s portfolio and insurability are both likely to decline. Consideration should be given to a compensation model that includes subscription or hourly fees. Alternatively, you might negotiate with the client to only provide limited post-retirement services. Examples include portfolio management and Medicare product support.
Another challenge you may face is that many of your clients plan to retire at roughly the same time as you. If not planned for, this leaves the client without support, and you with a lost opportunity. Part of the design of financial services for your retirees should include a succession plan for you as the advisor. This supports the client and helps you retain your goodwill and successful book of business (including perhaps your clients’ children).
There is no reason to lose your clients when they retire. Their retirement is simply an opportunity for you to move into a next phase relationship with them. And with proper planning, all parties will benefit. Retirement is both exciting and scary. Be there as an advisor who listens, and they’ll be your client for life.
Steve Parrish, JD, RICP, CLU, CHFC, AEP, is the co-director of the Center for Retirement Income at The American College of Financial Services, where he also serves as an adjunct professor of advanced planning. With over 45 years’ experience as an attorney and financial planner, Parrish frequently addresses the financial challenges of individuals, business owners, and executives nationwide.