Profit from retirement

This shift will engender the re-engineering of the conventional financial planning model to accommodate the changing needs of retirees, whose focus will shift to more “steady” and “certain growth” over their de-accumulation years from “aggressive” but “uncertain growth” during their wealth-accumulation years, suggests Kevin Sullivan, chartered strategic wealth professional, vice president and portfolio manager with Montreal-based MacDougall MacDougall & MacTier Inc. in Toronto.

At the same time, Sullivan says, your clients will expect you to address: complex challenges, such as the risks relating to unanticipated events; the potential for rising costs in areas such as health care and long-term care; estate and tax planning; trusts; intergenerational transfers and gifting; and insurance and other related areas. All of these areas will require you to become more involved in planning the golden years of your clients.

Fee-based advisors who charge a fixed, flat fee and have greater independence and flexibility in making recommendations to their clients are well positioned to benefit from the shift to wealth de-accumulation, compared with their counterparts who are purely commissions-based.

In part, that’s because “fixed fees are more transparent and are better understood than transactional fees,” says Trevor Parry, executive vice president and national sales director with Toronto-based Gordon B. Lang and Associates Inc.

There is another benefit to offering fee-based service to clients who are entering retirement, says Prem Malik, chartered accountant and financial advisor with Queensbury Securities Inc. in Toronto: “During the de-accumulation stage, clients become more conservative on the fear that they can outlive their money. And, consequently, [they] want more certainty in the fees they pay.”

And as these clients typically have larger pools of assets than clients who are still accumulating wealth, retired clients are more inclined to prefer a fee-based approach that offers a potentially lower, fixed fee, says Heather Holjevac, certified financial planner with TriDelta Financial Partners Inc. in Oakville, Ont.

At this stage, suggests Holjevac, these clients are entering the “maintenance phase” of their lives; thus, their focus is on optimizing the use of the funds they have accumulated. “Clients need more help with solutions,” she points out, “rather than products.”

Once retirement arrives and your clients begin to ask for assistance in the unwinding of their wealth, you will have to deal with the uncertainty of a largely unknown time horizon, during which your clients will be seeking a steady, stable stream of income.

This uncertainty will require counselling clients about the importance of careful risk management, says Parry, “which will be critical during the de-accumulation phase.”

This implies paying greater attention to various risk factors, including longevity, market volatility, interest rates and inflation.

When developing the asset-allocation strategy for your clients during this de-accumulation phase, there “should be no pressure to grow capital,” Holjevac says; rather, “the focus should be on income generation.”

But while products such as annuities and segregated funds with a guaranteed minimum withdrawal benefit may be appropriate during this phase, she notes, they also carry higher fees.

Parry, for his part, believes advisors helping clients with de-accumulation should “first and foremost, act as risk managers” and take a more “balanced approach with a bias to fixed income.”

Sullivan recommends investing in “very high-quality, blue-chip, dividend-paying stocks with a consistent ability to grow earnings and dividends. Ten years from now, the income generated from these stocks should be larger.”

Still, Sullivan cautions that the underlying focus should be on risk mitigation and asset protection.

Other uncertainties that require an emphasis on advice more likely to be covered by a set fee, as opposed to commissions on products, includes unanticipated events or rising costs.

For instance, Sullivan cautions that rising long-term care costs, especially if your clients want to have the option of living independently as long as possible, can represent “one of the largest outflows of cash for seniors.”

So can rising health-care costs and expenses associated with any unplanned event. “You have to go through different scenarios,” Holjevac suggests, “and ask ‘what if’ questions to come up with a viable plan.”

The consensus is that measures to address these risks should be in place long before retirement.

In serving your clients’ needs, you may require the assistance of other qualified professionals to design and implement the appropriate de-accumulation plan if you don’t have the training and expertise to fulfil all of your clients’ requirements, cautions Holjevac, adding that this would depend on the complexity of a client’s personal circumstances.

Accordingly, you may have to make greater use of your centres of influence, such as lawyers, accountants, and tax, estate and insurance professionals. In such cases, you will basically act as a consultant to ensure that your clients’ expectations are being fulfilled in accordance to their proposed plan.

For instance, your clients may require the assistance of: a lawyer to provide advice on estate, trusts, wills and related legal issues; an accountant or tax specialist to deal with taxation issues and the wealth-transfer part of the plan; or an insurance specialist for advice on complex insurance issues related to matters such as wealth protection and estate planning.

“You will have to maintain a network,” says Sullivan, “of professionals and informal relationships to deal with the complex requirements of clients.”

In essence, advisors who target the de-accumulation market must be able to deal with complex issues that are not typical during the wealth-accumulation phase.

“Fee-based advisors who use a discretionary model can structure individualized solutions,” Holjevac says, “and have the ability to use any product or solution.” IE