Advice In The Age Of Longevity

September 1, 2016 • Russ Hill

Many writers, including me, have discussed the ways the U.S. will be affected by people living longer lives. The big question for the developed economies is how these changing demographics will affect their social safety nets and reduce productivity when there are many more older people.

But how will the changes affect the RIA business? I rarely hear this question. Yet demographics will affect the ways RIAs offer service and the tools they use.

Older, Upper-Income Earners And Savers

RIA firms hold an unusual place in the financial lives of clients: Unlike tax-oriented CPA firms and most attorneys, an RIA has a long-term retainer relationship that is not transaction-based. Financial planning, done right, draws on a broader and deeper knowledge of client goals and needs than usually other financial professionals do.

The lifeblood of any RIA business is stable, long-term client relationships. Lately, people are talking about ways of deepening the relationships with younger investors or the children of current clients. That discussion has undeniable merit. But it frequently overlooks the expected length, and value, of an RIA’s existing baby boomer and “silent generation” relationships.

Employment and savings patterns are changing. Upper-income, older people continue to work and accumulate (see Figure 1). And upper-income earners more directly represent the population likely to be clients of RIA firms.

A recent survey shows a 50% increase in the number of working people age 65-74 over the last 15 years. Those age 75 and older in the top 20% of income earners saw an almost 150% increase in number of those working. (See Figure 2.)

The lack of savings often ascribed to the baby boomers is not evenly distributed among high and low earners.

These numbers go against the conventional wisdom, which focuses the diminishing asset base of aging clients, along with an increased relationship workload for RIAs. Instead, we see an older population more likely to be working, still accumulating, holding greater financial wealth, and perhaps more likely to continue on in this way for an increasing number of years.

Will these changing demographics result in different demands upon RIA firms? We think yes, for several reasons:

• These changes have implications for expected returns (the “savings glut” and the lower productivity components of growth in the economy). They will also change the way clients must consume cash flow—which means advisors must explore additional investment sources of return.

• Older clients will require other services besides financial ones. Also, as clients age, their family dynamics will change. Such changes will pose challenges to advisors but also offer them opportunities to present new solutions.

• Advisory firms themselves will face succession and management problems as advisors age. Clients deserve clear communications about how their firms are addressing these issues.

My “Top 10” list is not exhaustive. But it’s a beginning attempt to describe essential new services and attributes of RIA firms in this “Age of Longevity.”

No. 1. Advisors must use a more robust discovery and education process.

Almost all RIA firms have a formal or informal process for obtaining the information they need to create a holistic financial plan for their clients. In an age of longevity, the interviews will need to be robust. During this “discovery” period, advisors should ask clients about their non-financial goals as well as their financial ones. This is more difficult than it seems.

Consider this: A major software provider recently released a new version of its planning software that allowed more interaction with clients. When financial services professionals used the software, they “discovered” an average of 2.5 goals per client. But when clients used the software themselves, the average number of goals soared to 7.0. The more highly trained the financial professional, the more likely they are to interrupt with “solutions” too early in the process.

For similar reasons, we’ve found it has benefited our process enormously to train our financial professionals to listen in a structured way. Such a robust process also allows all the team members an introduction to clients at the outset of the relationships to reduce problems later on when other team members become involved in handling the clients. These team members also rely heavily on CRM solutions to usefully capture and share information appropriately.

No. 2. Advisors should offer a “longevity road map.”

After the discovery process, advisors should focus on assets and liabilities. It’s fair to say that most clients are primarily interested in money and finance as enablers of their life goals—and not as ends in themselves. But it’s important to know how well their lifestyles can be funded, which means understanding both sides of the asset/liability equation and the risks to each.

Traditional approaches to asset/liability can be supplemented with Monte Carlo analysis when there is uncertainty about market or life outcomes. Monte Carlo simulations are useful, but have drawbacks. They require advisors to estimate portfolio return patterns. Such estimates are difficult to get “right,” and a broad range of outcomes can reasonably be expected.

At our firm, we use Monte Carlo planning along with the concept of a “personal funded ratio” borrowed from the pension industry. Using commercially available current mortality and interest assumptions, we can create an easily understood picture for a client. Where do they stand on a present value basis with current assets and liabilities and discounted future inflows and spending?

After we show clients the different possibilities, there are several levers they can pull, especially what kind of investment risk they choose and how much they choose to spend on discretionary items.

We also help clients create and track their career (earnings) planning. As people work longer, and technology moves faster, people’s ability to remain relevant and useful in the workplace requires a more targeted effort. If a client wants to shift from a current occupation or no longer faces the need to develop financial capital, he or she can pursue new directions and interests and develop new capabilities.

Often overlooked is the need to create and maintain advanced care directives. We must also understand clients’ current state of cognitive ability and possibility of decline, reasoning with them this way: “Decide these things now, so your kids won’t have to.”

No. 3. Advisors must provide “curation” and support for clients’ careers, personal interests and health counseling.

We also know how interested most clients are in health. Studies show that the environment and personal behavior play a huge role in how healthy a person will be. When an advisor helps a client affiliate with legitimate and relevant sources of health information, it could prove to be a substantial differentiator. The successful RIA, in a position as the aggregator of assets, is also a better aggregator of health team members.

To cater to a person’s whole life, RIA firms need also to master network management. They can’t master all of the services themselves. Nor can they simply refer clients to other people. No, network management means curating lifestyle needs—vetting outside providers, making introductions easy, and monitoring the quality of the services provided by the people into whose hands they are putting clients.

Since your clients will be living longer, healthier lives, they can benefit from reinvesting in their human capital and developing personal interests outside of work. Outside specialists can help. They can provide aptitude testing, help clients focus their interests, and lead them to training and development courses. Clients could find services on their own, but RIAs can add value in sorting good from poor providers.

No. 4. Advisors must provide case management.

Core RIA clients are likely to be members of the “Sandwich Generation.” Many are sharing their homes with their adult children and caring for partially or fully dependent parents.

That’s difficult enough without considering that some of those family members will face physical ailments and cognitive decline. Families are being asked to cope with unfamiliar costs, skills and reimbursement practices while overseeing the services of caregivers. This is a particularly important area in which an RIA can provide value by going beyond simple referrals.

Along with financial analysis, advisors must know how to evaluate assisted-living facilities. They must know who actually provides good home health care (despite what the ads say). Is concierge medical care appropriate? Is it feasible for the aging parent to age in place at home? What can be done to facilitate this?

No. 5. Advisors must assist clients with personal security issues.

Cybercrime is in the news and on the rise. What can be done to reduce the instances of online fraud? Can a client’s digital footprint be traced—and reduced—by an expert? How should one view household help, who frequently have access to the most sensitive information—and how should they be vetted? Is a client’s residential security adequate, or could it be improved? When traveling, does a client have medical evacuation insurance in case of need? How do both the advisor and client recognize and guard against the threat of elderly exploitation?

Advisors who know these issues add value. It can be difficult for clients to separate the wheat from the chaff when it comes to examining cybersecurity products and services. And it’s challenging to integrate all this knowledge with the protection of assets, while including the right family members in holistic planning and implementation. But it is imperative to know the subject, nonetheless.

No. 6. Advisors must provide a management system for unwinding assets.

A core function of most RIA firms in the age of longevity is the management of distributions—as opposed to accumulation. Of course, asset location and tax optimization are key components for any such system.

More important, the system has to manage more than market action. Changes in interest rates and in clients’ personal goals, spending and health all play a part as well, and this renders algorithmic approaches difficult if not impossible. Here again, the funded ratio approach yields an intuitive and rigorous basis for a periodic discussion that can incorporate all these factors and point toward course corrections as needed.

No. 7. Advisors must understand the usefulness of annuities.

It’s probable that we’re entering a multiyear lower investment return environment. What is a retiree, concerned about longevity and needing income, to do? Academics have a simple answer: Annuitize your wealth. And they wonder why the adoption of annuities is so low.

The “annuity puzzle” turns out to not be such a puzzle after all, as most investors have a strong preference for liquidity in the face of uncertainty, especially when they are uncertain about health care and longevity. A fixed annuity (rather than a pricey variable version) can supplement low investment returns with mortality credits for clients at older ages and back up a balanced investment program that might run into a bad market.

RIAs, as fiduciaries, will have to come to grips with the effects of removing assets from AUM calculations if they are to serve the best interests of some clients. They will have to understand fixed annuities, deferred annuities and even hybrid products and know when these items are appropriate to support clients’ long-term care needs.

No. 8. Advisors must understand reverse mortgages.

The reverse mortgage industry has improved, and in the right circumstances, these mortgages are no longer last-gasp solutions but valuable options for retirees. Correctly done, the reverse mortgage may never be called upon to generate tax-free cash—but it can improve a client’s funded ratio if necessary.

Regulators have noticed. Recent DOL pronouncements acknowledge that both reverse mortgages and annuities will likely be a necessary part of an RIA’s tool kit.

No. 9. Advisors must offer a digital advice platform.

The “threat” from robo-advisors has receded, but the efficiency of these online tools and their 24-7 availability will transform RIA operations. Many advisors will likely be surprised how fast generations older than millennials adopt these platforms. They will likely even begin to require robos as they increasingly prefer to interact or receive information on their own schedules, not on an advisor’s.

The good news is that the cost savings will help RIAs handle more family accounts of multi-generational clients, which have in the past split up the investable assets into too many pools for advisors to profitably manage. So digital advice holds the promise of deepening relationships while reducing costs.

No. 10. Advisors must create an internal development and succession plan.

RIA owners face all the same decisions that their older, highly paid clients do. Many will wish to continue working—to continue contributing their vast experience to clients with whom they’ve developed deep relationships. At the same time, they face opposing pressures from younger associates seeking greater opportunities at their firms, and clients want those state-of-the-art skills and fresh insights and energy. As do other professionals who refer the firms.

Advisors must offer those doorways to younger staff, which will require complex cash incentives, along with management and leadership opportunities. Prospective associates see the importance of working with or being part of a highly skilled team. The clients see it, too, and that will likely be a key factor in their decisions about who is best positioned to take care of them.

In The Age Of Longevity, It’s Time For Amazing

It’s not enough to simply offer these concepts: Can you be amazing?

Just as referrals are vital to the growth and vitality of an RIA business, curation and support—not just information—will become the currency of trusted relationships.

Historically, financial services businesses have been part of a pipeline business chain. The differences in their compensation reflected how close they were to either the product manufacturer or to the end client. In a pipeline business, there’s a step-by-step arrangement for transferring value between producers and consumers. A fiduciary RIA is on the same side of the table as a client, and thus is much closer to the consumer end of the chain.

But at some point, the fiduciary model will no longer be enough to win clients’ loyalty. When platform businesses compete with pipeline businesses, the platform nearly always wins.

Just think of Amazon. It started as an online bookstore and currently accounts for about 40% of U.S. book sales. But now look at the menu. How often do you go on Amazon? How many retailers has it crowded out or severely impacted? Amazon is the quintessential platform business: Its model enables value-creating interactions between external producers and consumers—and it captures a small piece of each interaction.

It’s unlikely that any RIA will become an Amazon, but a bit of “amazing” will be necessary for the advisory firm’s continued success and sustainability.

RUSS HILL is chairman of RIA Halbert Hargrove and a co-founder of Stanford University’s Longevity Institute. He is also the chairman of the Investment Committee for MemorialCare Health Systems, the International Center for Wealth Advisory Excellence and the New Retirement Forum.

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