It’s difficult to admit that things one believes to be true just aren’t. Here are three retirement-related truisms many advisors believe, which rank a bit high on the tooth-fairy scale. Feel free to disagree.
Myth No. 1: Advisors do a great job talking about retirement. The Alliance for Lifetime Income released a breathtaking report in October—in the unfortunate sense of how you feel when suddenly plunging into icy water. Based on research by David Blanchett, managing director and head of retirement research for PGIM DC Solutions, the report compared how advisors and advised clients perceive their discussions regarding retirement. Too often, the perceptions are miles apart. For example, 97% of advisors surveyed said they talk with their clients regularly about handling required minimum distributions. In contrast, only 54% of investors working with financial professionals said they discussed RMDs with their advisors. Nearly all advisors (96%) say they discuss other withdrawal strategies, but only 66% of clients agree. Similarly, 70% of financial advisors say they frequently talk to clients about how they will spend their time in retirement. In comparison, only 29% of clients said their advisor frequently engages in such conversations. Although not as dramatic, some of the other gaps involved discussing tax minimization in retirement, income planning and budgeting.
The report was covered in the trade press, but not to the extent I believe it merits. To find out what the survey’s author thinks about the advisor-client disconnect, I called David Blanchett, who had written in a LinkedIn post expressing that clients may be forgetting the specifics of their discussions with advisors because those sessions are often jam-packed with various topics and information. While that’s undoubtedly true, I suggested that clients are probably more honest than advisors about their retirement discussions. I suspect many advisors feel social and firm pressure to talk more about retirement but often don’t because they don’t have the tools or knowledge, would prefer to talk about investments or just don’t care about providing financial and retirement planning.
Blanchett was more nuanced, indicating that many advisors still feel more comfortable discussing investments than anything else.
“The survey received responses from advisors in all channels,” he said. “While I’ve been very excited about the evolution of the profession over the past two decades, there is still a long way to go, and some advisors are still stockbrokers.”
The economics of providing retirement advice are at play here. While pure financial planners have found ways to get paid for advice, investment-oriented advisors still find the economics of providing retirement advice off-kilter since advisors getting paid on AUM have a financial incentive to spend as little time as possible on anything other than investments. Time-based fees are not a favorite of most investment-oriented advisors, as time is finite, and brokerage clients are often reluctant to write a check for something they never paid for discretely.
“There is an advice gap for people with modest wealth,” Blanchett said. “They need to be able to ask questions of someone who’s independent and not trying to sell them something.”
Given long-entrenched compensation arrangements, receiving fiduciary-level retirement advice from the broker/dealer segment of the advice business will remain a hit-or-miss proposition.
Myth No. 2: Monte Carlo analysis predicts retirement success or failure. My wife and I have a 99% chance of not running out of money if we live to 92. Whoop-de-financial-planning do. That 99% probability, based on a recent Monte Carlo analysis done on our retirement accounts, is largely meaningless. Even if most financial planning clients understood the statistics behind the simulations, I think they would remain anxious about whether they have enough money to make it through retirement because they understand in their gut that real life is full of surprises that a computer simulation ignores. What if a grown child or grandkid unexpectedly needs your help? What if you or your spouse or both wind up in a nursing home? Fill in your own what-ifs, and it’s easy to conclude that Monte Carlo simulations are nice to run but simplistic.
I’m not doubting the value of a tool that can tell you the likelihood of a set pot of money lasting for X years based on historical patterns. If the Monte Carlo analysis on our portfolio came up with a 90% chance that my wife and I would run out of money, we would be so traumatized that we’d change our spending and overall living habits immediately. But in a way, that’s why pinning retirement success on a high Monte Carlo probability has taken on a mythic dimension. It’s easier to believe in a number or “the number” (the pot of money you need to retire) than is to make financial planning for retirement an iterative process that requires regular updating and tweaking to make sense.
Myth No. 3: Prepare for a massive baby boomer wealth transfer. We all know the numbers—millions of baby boomers are sitting on trillions of dollars of wealth that their kids will inherit when they die. That’s why there are so many “how-to” stories, guides and conference sessions devoted to luring the adult children of wealthy clients to your practice. Prolific blogger Josh Brown of Ritholtz Wealth Management goes so far as to call this obsession with wealth transfer “porn for financial advisors.”
Will there be a generational transfer? Yes. Will it be as mouth-watering as advisors expect? No. Here’s why. First, while some advisors report that there is a segment of retirees who underspend, that group is admittedly small. Many retirees spend more in the early years of retirement than they did while working because they want to travel and enjoy life while they feel they have the physical stamina to do so. Others live pretty much the way they lived while working—which requires an equivalent income level.
But responsible boomers are cautious. Many have or had parents who lived to quite an old age. My mother, for example, lived to 95 and my mother-in-law to 97. Who do you think helped them financially in their final years when they needed extra care? Realizing they don’t know what’s ahead, many boomers want to keep a sufficient nest egg so they don’t become a burden to their children. If the money is needed, for most of the “millionaire-next-door” types who constitute the bulk of many advisors’ clientele, it will be gone before their adult children can inherit it.
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