Many advisors built their practice on a generation of investors in the accumulation stage of their financial journey. Their Boomer clients were saving vast sums as their discretionary income rose. While advisors’ practices are still at the mercy of trendsetting Boomers, now, their practices are at risk as a generational shift from saving to spending unfolds.
Boomers are shifting their focus away from accumulation toward decumulation. Rather
than building their nest egg, they are beginning to use their investments for cash flow. As Boomers enter the decumulation stage, their behaviour shifts, and advisors need to shift their practice along with them.
The key behavioural change that advisors must plan for is the consolidation of client assets. While investors may use two or more advisors in the accumulation stage of their financial journey, they often switch to just one advisor at or near the decumulation stage as a result of several life milestones: 1) a career change, 2) they start to think about or enter retirement and 3) they start receiving Old Age Security benefits and begin converting their Registered Retirement Savings Plans to Registered Retirement Income Funds. Consolidation triggers are predictable, so advisors can plan and get in front of the risk.
Why do investors consolidate? To simplify their financial affairs. Investors rightly believe that a streamlined portfolio is ideal for generating a single income stream in retirement, optimizing drawdown through volatile markets and leaving an uncomplicated legacy.
“About 50 per cent of investors will consolidate,” says Ingrid Macintosh, Vice President, Wealth, Head of Sales Enablement and Client Portfolio Management at TD Asset Management. “That means there will be a bifurcation of winners and losers among advisors. Preparing for this behavioural shift long in advance will help advisors get on the winning side.”
Advisors must develop their so-called “soft skills”
By 2026, people aged 55 and over will control 72 per cent of all Canadian wealth. That represents a significant amount of assets that could be changing hands over the next five years1. The challenge is
obviously the rising potential for advisors to lose clients and assets. But this also presents opportunity. For example, advisors could take steps to meet spouses and children, as well as to shift their focus to a higher service level and potentially grow their book.
“A lot of this comes down to becoming a trusted source for matters that begin with, but also go beyond, financial decisions,” says Macintosh. “The goal is to become a complete lifestyle planner. To achieve this, advisors have to ask the right questions that go beyond a client’s portfolio of investments. Questions like: What will your life look like? Where will you live? What will you do with your time? and What will you do if your spouse dies or becomes seriously ill? These get right to the core of client needs.”
Clients may not have considered these questions and, as a result, advisors could end up having uncomfortable and unexpected conversations. This is the area where finances and lifestyle meet and, despite being highly important, it is often overlooked. That’s one reason why it is important
for advisors to develop the “soft skills” of relationship management.
It is also time to refresh “hard skills”
Today, moving clients from a traditionally higher-risk portfolio to a lower-risk portfolio may not necessarily be the best course of action as bonds may not be enough to meet clients’ cash flow needs given the current low interest rate environment.
Another area that advisors need to help their clients manage is the potential for a 2008-like event where all financial markets dropped and triggered a global recession. Sequence of returns risk is the Achilles’ heel of clients in the decumulation stage of their financial journey. As the financial crisis made clear, a significant market decline near retirement can shrink a nest egg to the point that retirement may have to be delayed or put on hold. And, if retirement cannot be postponed, clients will be drawing down from a smaller pool of assets. This results in two potential outcomes, neither of which is good for living a long and healthy retirement. First, clients may have to reduce their cash flow. Second, they may run out of money later in their retirement.
So, what is an advisor to do? Create excellent retirement plans that are grounded in a deep understanding of the financial and lifestyle challenges that clients in the decumulation stage face, such as potentially low interest rates and sequence of returns risk. Advisors need to develop a deep understanding of their clients’ vision of retirement to ensure the advice they deliver is appropriate.
Broadening your client experience to include tax and estate planning, including legacy planning, is a good idea. These services help you build trust. “Money saved from taxes is money to use for retirement and other financial goals,” says Macintosh. “If advisors can be the source of these ideas and guide them through the process, it will be good for both clients and advisors.”
Practical steps for advisors managing drawdown
Advisors must find strategies to scale their practices. The first step is to segment the advisor’s book of business into life stages and identify client needs at those stages. The next step is to streamline their product shelf with fewer solutions to create efficiencies. After that, it is time to create similar model portfolios and service packages for similar clients.
Advisors should also invest time differentiating themselves from competitors as a highly personalized service cannot be replicated by other advisors. “We’re in the investment business, but it’s a human
business first,” says Macintosh, “Always treat clients with a holistic mindset, looking for ways to add value. That means including spouses and children in the conversation and building legacy planning into the relationship.”
Another critical area is to develop the technical expertise to construct suitable portfolios for clients in decumulation. These types of portfolios tend to be cash flow oriented, tax efficient and focused on downside protection to insulate against drawdowns and market volatility.
Work with an asset manager who understands the complete retirement journey.Knowledgeable asset managers can help advisors construct model retirement portfolios and rebalance to help meet
clients’ cash flow needs. This gives advisors more time to spend building trust-based relationships with their clients.
“It’s important for advisors to partner with asset managers with the institutional knowledge to provide solutions engineered to create different investment outcomes, such as low volatility and risk-managed strategies,” says Macintosh, “Knowing that an asset manager has a shelf that can help meet the challenges of drawdown can free up time for advisors to focus on the relationship side of their business, while ensuring that downside protection is incorporated into their clients’ portfolios, particularly in the retirement drawdown stage.”
Advisors should expect asset managers to provide the tools and resources they need to navigate the unique challenges of decumulation and the potentially challenging conversations of this phase. “At TD Asset Management, we work actively with advisors across Canada, and know that this inflection point is already happening,” says Macintosh. “It helps to have an asset management firm with a strong background in institutional fund management, that understands the needs of clients in retirement and the potential funding shortfalls, the importance of risk-adjusted returns, and has the curated shelf of solutions that can help advisors work with their retired and pre-retirement clients’ to efficiently manage through the retirement income planning years.”
While the shift to decumulation requires preparation, these changes present significant opportunities for advisors to grow their books. It is important for advisors to shift to a higher service model with a more holistic approach, streamline their businesses and lean on quality asset managers for the resources and investment solutions that will help them prepare clients, and their families, for this critical stage of their financial journeys.
12017 Investor Economics Household Income Report, Reader’s Digest Presentation
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