As defined benefit (DB) pension plans become increasingly scarce, financial advisors are shouldering far greater responsibility for ensuring their clients are financially prepared for retirement, according to Mark Fuller, president and CEO of the Ontario Pension Board.
Speaking at the Canadian Institute of Financial Planners’ annual conference in Vancouver on Tuesday, Fuller highlighted the slew of recent challenges facing DB pension plans, including market volatility, low rates of return and widespread funding shortfalls. As employers struggle with these and other challenges, Fuller pointed out that many are abandoning DB plans in favour of defined contribution (DC) plans and other models that shift a greater proportion of the investment risk and the contribution responsibility to the employees.
“Defined benefit pension plans are under siege,” Fuller said. “What’s taking place here is a big-time transfer of risk from employers to employees, and a big-time move from collective risk to individual risk bearing.”
Amid this shift towards self-reliance and individual responsibility, financial advisors are assuming an increasingly important role in the retirement savings system. Whereas many clients would previously have had their advisor manage just a portion of their nest egg while relying on their pension for the bulk of their retirement savings, a growing number of clients are now relying on their advisor to manage the entirety of their nest egg.
“The decline of the DB model dramatically increases the weight of responsibility on [the financial planning] profession,” Fuller said.
With a huge range of investment products and savings vehicles available to investors – many of which are increasingly complex in nature – advice has become more critical than ever, he added.
“In my perspective,” he said, “outstanding advice is the only antidote to complexity.”
As advisors take on this hefty responsibility, Fuller said they may need to adjust the types of conversations they’re having with clients. Given the larger proportion of assets at stake, he said risk management should be front and centre in client meetings. He urges advisors to address risk not only in the context of their clients’ investment risk tolerance, but in the context of their broader “risk capacity”, including inflation risk, longevity risk, health concerns and other problems that could arise.
Although these kinds of conversations may be uncomfortable, Fuller said it’s the advisor’s responsibility to ensure clients are aware of and prepared for these risks.
“You need to look at, and help your clients plan for, downside scenarios,” he said.
When talking to clients, advisors should also focus less on asset accumulation and more on income generation, Fuller said. He urges advisors to educate clients on annuities and other products designed to create a lifetime cashflow.
“The decline of DB dramatically increases the need for financial planners to adopt a completely target income driven approach with their clients,” he said. “I would urge you to make helping your clients manage lifetime income your primary focus.”