“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.



Advisor: In a recent column, you suggested three specific markets — retirement income distribution, life planning and succession planning for business owners — that you felt were being underserved by financial advisors in general and might be areas of opportunity for someone (like me) who wants to reinvigorate his practice by providing a different range of products and services.

The [market] that caught my attention right away was the first. It struck me like a thunderbolt that I have spent my career as an advisor helping clients accumulate their wealth but haven’t done a particularly good job of helping them find the best way to manage it during its drawdown to fund my clients’ retirement lifestyles.

Sure, we have used computer-generated projections with Monte Carlo simulations, etc., to illustrate how long their assets should last, based on certain assumptions. But we haven’t been nearly as good at advising them on how, on a day-to-day basis, we could manage their money to improve the chances that the projections will turn out to be at least close to correct. I feel as if I have done only half the job so far for my clients and want to change that by becoming a retirement-income distribution expert. Since you suggested it as a good strategy to pursue, would you mind elaborating on what you feel that would entail?



Coach says: The coming year represents a watershed for retirees as the first wave of the Canadian baby-boomer generation (born between 1947 and 1966) reaches age 65. While not all 350,000 of next year’s crop will retire (some already have), there is no question this is a significant milestone. Not only is the boomer gang showing its presence in the world of retirement now, it will continue to do so over the next 20 years, as the rest of the cohort works its way toward the age of 65. Couple this situation with data from a November 2010 Harris/Decima poll, which reports that more than half (55%) of Canadian boomers surveyed did not think they could afford their dream retirement lifestyles, and we financial advisors have a huge chance to improve people’s lives.

With the recent recession and market meltdown of 2008-09 cutting deep into portfolios and driving investors into perceived safer but low-yield investments, retirees need a plan for making the most of their assets now more than ever.

And let’s keep in mind, as I had indicated in that earlier column, that being an income-distribution specialist isn’t just about making clients’ money last. It’s about supporting those clients emotionally. That support comes in the form of: helping them understand that they can mitigate the taxes that may eat away at their nest eggs; demonstrating that they can invest conservatively yet still have their withdrawals keep pace with inflation; and showing that they can protect what they have accumulated through the market declines that will inevitably come along through the 20 to 25 years or more that many clients will be retired.

For some retirees, the familiar concerns about spending too much and having nothing left to leave to others will persist. You can show them how to reduce the risk of that happening. In fact, to answer to your question about what being a retirement-income specialist entails: it is all about managing risk — which, I hope, is already a key tenet of the work you do with your clients.

When your clients make the transition into retirement mode, however, they are exposed to new risks in addition to those they had to contend with in pre-retirement.

Here are some of the major risks faced by retirees that you need to be able to help your clients understand and manage:

> Living Too Long. In the “old days,” people traditionally worked until age 65 (or 70) and then lived another five to 10 years in retirement. Under that scenario, an investment strategy could be fairly easy to manage over such a relatively short period.

In today’s world, we can expect people coming up for retirement to live well into their 90s. Consequently, plenty of retirees will need help managing their portfolios for 25 or 30 years. That’s longer than many spent in building them.@page_break@> Inflation. Even if today’s low inflation rate of 2% persists for the next 25 years (which is highly unlikely), it would reduce the purchasing power of a fixed retirement income by 40% in that period. An average rate as low as 3% would cut buying power in half. An average rate of 5% would have a double whammy: chopping purchasing capability by 50% in about 15 years.

> Low Risk, Low Yield. The low interest-rate environment of the past decade has highlighted the inherent risk in the traditional notion of converting equity assets into so-called “safe” investments, such as bonds or guaranteed investment certificates, at retirement. Proper asset allocation among equities, debt assets and cash will be just as important to reduce volatility and improve overall returns post-retirement as it was pre-retirement.

> Spending Too Much. It is a challenge to convince someone with a $1-million portfolio that withdrawing more than $4,000-$5,000 a month (plus inflation) in income from their investments puts them at risk of running out of money before they run out of life. But withdrawal rates greater than 4% or 5% do just that.

Juggling all those sometimes conflicting priorities requires you to have a thorough understanding of social and private benefit programs, investments, tax issues, insurance products and estate-planning tactics. Even if you rely on other professional specialists, such as lawyers and accountants, to round out your team for an income-distribution plan, you, as the “quarterback,” need to understand all the parts.

We have been talking so far about helping clients who are planning to fund their post-retirement years with the wealth they have accumulated before retirement. There is, however, a further significant trend occurring that adds both a twist and an opportunity. Fewer people than ever, as a percentage of the retired demographic, are going directly from full-time work to full-time leisure. Many retirees are taking time along the way to pursue a second, third, fourth or fifth career. These sometimes are part-time jobs, taken out of necessity or simply for personal satisfaction.

This new “retirementality” requires a different investment strategy to ensure adequate capital is available to generate varying levels of supplemental income at specific times or to fund travel, hobbies or a hamburger franchise (should that be the chosen path to retirement nirvana).

Helping your clients understand all the options and ramifications can lead to even more challenging conversations than when you were in pre-retirement planning mode. Income-distribution planning often requires you to promote immediate compromises, such as convincing clients they need to work longer than they wanted to in order to boost their nest egg or persuading them to reduce their current lifestyle spending so they can retire earlier.

Here is where, we hope, you have developed deep, honest and trusting relationships with your clients. If that is not the case for the majority of your clients today, you’d better get working on it now or risk losing them to another advisor who has positioned himself or herself to help them execute a retirement-income distribution plan. It’s a quirk of human nature that we will take bad news from a relative stranger whom we perceive as an “expert” more readily than we will from our “regular guy.”

The bottom line, as I see it, is that it would be a shame for any advisor to spend a lifetime helping clients build their wealth, only to lose them at the brink of retirement. Not only would you have to recruit a large number of new (and probably lower-revenue) clients or see the value of your practice decline as you approach your own retirement; you’d also have to suffer the insult of having long-standing clients say, in effect, that they had outgrown your capabilities. IE



George Hartman is president of Market Logics Inc. Send questions, comments and opinions on any aspect of practice management to george@marketlogics.ca.