Whether or not you recently watched Super Bowl LVIII, can you imagine playing the game without the field markings or goalposts? Of course not. Without a way to measure how the teams are doing, it’s just a bunch of guys tossing a football.
And yet, when it comes to our assets, particularly in planning for retirement, many are just tossing the football. They are uncertain about what they need to maintain their lifestyle and so cannot measure the effectiveness of their investment plan.
Various studies have found that more than half to nearly two-thirds of Americans are underprepared for retirement. Last year, 57% of Americans reported that they sought out financial advice, according to a December 2023 Bankrate survey, which sounds like a step in the right direction. However, a further breakdown of that study reveals that only 35% of those who sought advice looked to financial professionals for information. The most popular source of information: friends and family (47%).
Drilling down further into the Bankrate study, 46% of baby boomers and 51% of Gen Xers said they sought financial advice last year. Yet just 52% of boomers and 32% of Gen X consulted a financial professional for that advice — at a time in their lives when they are facing a potential income cliff.
Worse, without a defined financial goal, there are no guardrails on the types of investments appropriate to them, so everything seems like fair game.
Lack of Integration
In teaching and coaching people who are in pre-retirement, I am also seeing a lack of integration between their goals and the goalposts. Without a metric to help clients understand where they are relative to their needs and goals, how do they know when they’ve arrived?
Want to know if your clients are playing in the super bowl or just tossing the football? Here’s a simple question to ask them.
If your investment portfolio(s) generated 4% income annually and you added in any other defined benefit, how close would that income get you to meeting your financial needs in retirement?
While we’d all like to think that our clients are the exception, you might be surprised at their answers.
One client told me he didn’t realize this was important for him to know, although upon being questioned further, he admitted that his financial advisor didn’t have his budget needs, so would not have been able to guide him in this discussion.
Another client, in a frustrated tone, told me that prior to our conversation she didn’t know where to get the various income numbers from and just assumed that if she kept saving in her retirement plan, she’d be fine.
Needed: A Wide-Angle Lens
Financial advisors are often characterized as professionals whose main roles are to help clients grow and manage their investment portfolios. Perhaps we need to redefine and refine that characterization.
Growing an investment portfolio is only part of the equation. We also need to help reframe our clients’ focus on maintaining their standard of living in retirement.
As advisors, shouldn’t we be helping our clients to look at their lifetime of savings and investing through the lens of providing for the life they desire in retirement?
And a Narrow Focus
Urging clients to open a “My Social Security Account” on the ssa.gov website encourages them to explore and understand their retirement income possibilities from Social Security. The website offers a sliding income projection, based on whether they choose to take Social Security early, at age 62, or at any time along the path to age 70.
Many retirement plan providers assist in this information, as well. Some have added a projection capability so that employees can estimate their future retirement benefits.
I find that involving clients in gathering this information makes the process of retirement saving and investing more real. And, when budgeting choices need to be made, the process of involving them engages them more fully.
Better than her wildest dreams
I recently worked with a client who was afraid to put her retirement income numbers together. She was not a highly paid employee but had many years of service with her employer. She was a diligent retirement plan saver and by her own admission, unsophisticated. Consequently, she had opted to invest her retirement savings in a balanced portfolio. In advance of our conversation, I asked her to come prepared with the dollar amounts of her Social Security payment and her defined benefit payment. I then showed her how her balanced portfolio could generate 3% to 4% annually with just a few minor adjustments.
She was moved to tears.
She discovered that her combined retirement pay would generate more than she’d ever earned, due to her years of service. Her family medical history placed her beyond the lifespan she thought possible; she was afraid that her remaining years would be a financial struggle. Her excitement over learning that she would easily be able to maintain her lifestyle was palpable.
I love client calls like that.
Unfortunately, the results aren’t always that good.
When reality falls short
Another client, also quickly approaching retirement, spoke and spent as though he was going to be fine in retirement. I asked him the question I posed at the beginning of this article; about how close his investment portfolio could get him to his needs. He was stunned. After working with his financial advisor for years, he had never been asked to frame his investment goals into monthly income capabilities.
Frankly, I was also stunned. As we dug deeper, it turns out that his portfolio and other retirement benefits will not be enough to maintain his lifestyle. With only a few years left until his hoped-for retirement date, he’ll have to make some hard choices in order to shore up his finances.
Measuring Our Effectiveness as Advisors
Defining the role of financial advisor is often left to the relationship between the parties. From a regulatory standpoint, many general guidelines exist. But the actual relationship between client and advisor often develops over time.
How can we measure our effectiveness? Even the institutions are joining the conversation. For years, Morningstar researchers have calculated how much better off clients are with optimal retirement-income planning strategies that advisors would implement. Defining the difference between a typical baseline portfolio and an advisor-optimized portfolio as “gamma,” Morningstar researchers David Blanchett and Paul Kaplan calculated retirees could expect an annual increase of +1.59% with an optimal strategy.
Vanguard Advisors also periodically reports on what they call an “advisor’s alpha.” This is the value that a financial advisor adds to the client’s portfolio, using Vanguard’s investment matrix and metrics. Estimates on the return on investment from having a financial advisor vary. Vanguard’s estimates of the net effect of a financial advisor vary by more than 50% from Morningstar’s. In a 2020 whitepaper, Vanguard estimated advisor’s alpha to be about a 3% net return per year, depending on a client’s circumstances and investments.
Additional Reading: 5 TIps to Reduce Beneficiary Stress Levels
Efforts to quantify the benefits of working with an advisor fail largely because the benefits are more easily defined quantitively. Developing a holistic financial plan, scheduling regular check-ins toward financial goals, helping clients to become and stay debt-free and make smarter financial decisions are all important. But being able to articulate your value proposition, how you gain buy-in from clients, and how you continue to teach, inform and encourage clients are equally critical.
Preparing for a New Chapter
In the retirement programs I teach, I always ask the participants to tell me, as succinctly as possible, why they invest in their retirement plan. Only occasionally does someone answer that it’s to maintain their desired standard of living. We’ve done such a great job encouraging people to save and invest. But I fear that we’ve forgotten how to make it real for our clients, by helping them tie results to retirement-spending needs.
Sometimes, the reality hits them when it’s too late to achieve enough growth in their portfolios to make a difference. That’s when panic sets in for them, and sadness for me.
I tell clients that retirement is just a new chapter and that for many of us, it lasts for years. I remind them that means their retirement assets need to keep growing, to keep a comfortable margin over the effects of taxation and inflation.
Those conversations also help redefine how they look at their choices. Cutting down on expenses now, in order to invest strategically for the future, is one choice. Working longer, to earn 100% of their salary and still have access to contributory retirement plans, is another choice.
Informed Choice Only Happens with Knowledge
In the fraught world of investment advice, remember to distinguish between what matters and things you can control. Then concentrate on the sliver of overlap.
Helping your client understanding the income they’ll derive from their investments, measuring that against what they will need and want, and continuing to guide them forward to success may be the new definition of a successful advisor.
Who knows? You might just help your client become the next Patrick Mahomes.
llene Slatko, CEO and founder of DSS Consulting, coaches clients on building strong financial decision-making skills. Her focus is most often women dealing with the long-tail of a divorce or the death of a loved one. Ilene’s new project, Metamorphosis, is an e-learning platform designed specifically to guide subscribers through pre-retirement and retirement issues. She spent over 25 years as a financial advisor and built her business through her seminar series, “Women and Their Money.” Ilene is also a subject-matter expert on the Federal Employees Retirement System (FERS) and speaks to audiences across the civil-service spectrum.
