1 Engaging Clients in a New Way Putting the Findings of Behavioral Finance Strategies to Work Written by: Joseph W. Jordan, MetLife Behavioral Finance Strategies Dan Weinberger, MetLife Retirement Income Strategies Joel L. Franks, MetLife Behavioral Finance Strategies Signature Snoopy.ai For Financial Professionals Only. Not for use with clients, prospects or general public. See back page for important disclosure.
2 2 Engaging Clients in a New Way About The Authors Joseph W. Jordan Joe Jordan, Senior Vice President, MetLife, is an industry-renowned thought leader in the areas of behavioral economics, client-centric tools, ethical selling and client advocacy. He is currently responsible for MetLife s Behavioral Finance Strategies. He has over 36 years financial services industry experience. Previously, he managed Product Development and Marketing of all Retail Insurance and Annuity Products, and he started fee-based Financial Planning for MetLife. His past experience includes National Sales Manager for Insurance Products at PaineWebber. He was a Founder of the National Association Of Variable Annuities (NAVA, now known as the Insured Retirement Institute). Some of his well-known keynote speaking engagements include: 2004 Million Dollar Round Table; 2006 and 2010 MDRT Experience in Bangkok, Thailand and Seoul, South Korea; 2006 and 2009 GAMA LAMP; LIMRA s 2008 Retirement Industry Conference ; MDRT Ireland, Greece and Poland between 2009 and In 2010, Mr. Jordan was selected as one of the top 50 Irish Americans on Wall Street. Dan Weinberger Dan Weinberger, Vice President, MetLife has been in the Financial Services Industry for more than 23 years. His experience includes Product Illustration Development, time in his own Sales Practice, Product Development, Product Marketing, Communications, Sales Tools Development and Sales support and training. Currently he is focused on Behavioral Finance and Retirement Product Strategies and is the lead architect and resident expert on the MetLife patent pending Retirement Income Selector. He is a regular speaker at MetLife and other Industry events. Joel L. Franks Joel Franks, Behavioral Finance Strategies, MetLife, has over 19 years marketing experience in the financial industry including banking, brokerage and insurance. Prior to MetLife, he was an independent marketing consultant to several corporate and financial services organizations in the Northeast. Previously, he was the Assistant Vice President, Marketing at USAlliance Federal Credit Union and, prior to that, he held the same position at Morgan Stanley. He holds both a BBA and MBA in Marketing.
3 3 Contents 04 Introduction 05 Changing How We Think 06 What This Paper Hopes to Achieve 07 The Gap Between Knowledge and Understanding 08 Ready (Or Mostly Not), Here Comes The Retirement Paradigm Shift 09 How Do People Make Financial Decisions? 10 What the Financial Services Culture Has Forgotten 12 Three Behavioral Ideas To Consider 15 Flexibility Versus Guarantees: Helping Investors Decide 16 Connecting with Clients Retirement Income Mindset 18 What s Your Retirement Mindset? 19 In Conclusion New Rules of Engagement 21 Appendix 23 Resources 24 Study 25 Notes
4 4 4 Engaging Clients in a New Way Introduction Financial professionals are faced with a daunting task as they help clients prepare plan, and execute a successful retirement. It is clear that there is a large gap between the knowledge and experience clients gained during their time as savers, saving for retirement, and the risks and challenges they will face as they become their own income provider during retirement. This is a gap that financial advisors can help bridge and many consumers believe that their advisor can do just that. However, this shift from accumulation to distribution will require that advisors take new approaches with their existing clients (and reach out to yet other retirees who will need an advisor), to not only educate them on the facts, but to connect to clients in a meaningful way. In addition to clients themselves, it will also be important for advisors to take a lead role in educating and involving the client s other tax and legal advisors who surely will have an influence and role in the client s decision-making process. They too will need to look at things from a different perspective. Lift art from on-line Peanuts Art Bank sn_11b.ai
5 5 Changing How We Think By all accounts this is a major paradigm shift. One that is all about income and the strategies in place to make it last as long as one s retirement does. Clients were asked what held the most importance Money, Medicine, Meaning or Place? What will be critical is a lifestyle sustaining retirement income that keeps pace with inflation and minimizes the risk of running out of money. This is not a problem that can be solved purely with the right set of analytic tools and traditional investment strategies. Analysis will be part of the solution. Before that can happen we need to consider how clients feel when it comes to financial decisions and how, as financial advisors, we must connect with our clients. This is more important than ever as demonstrated in a recent MetLife Survey. 1 Clients were asked what held the most importance Money, Medicine, Meaning or Place? At all ages Meaning ranks highest and increases in importance as we age (see complete details in appendix). Meaning is a reflection of how we feel and what is emotionally important to us. This suggests that our clients approaching retirement are seeking more than just income. They will want to participate in their own solution, understand the new set of risks they are facing, and implement (with their advisor s guidance), a solution that feels right relative to their unique retirement mindset.
6 6 6 Engaging Clients in a New Way What This Paper Hopes to Achieve This paper will attempt to provide financial professionals with a new way of engaging clients for their retirement income decisions. We must account for both the retirement income mindset and actual financial picture by: 1. Discovering what drives an individual s internal financial decision-making process. 2. Suggesting a model for how financial advisors can create a balance between how our clients feel about their retirement income as well as what they think about retirement income. This report will cite several recent news articles and research papers. It will also reference research completed by several groups within MetLife including MetLife s U.S. Business Marketing Research Department, MetLife U.K., and MetLife s Mature Market Institute. There is a complete bibliography in the appendix for any researchers that are cited including research conducted by MetLife. Drawn by LoBianco Studios for Life Advice "Disability Insurance" Brochure 4/96
7 7 The Gap Between Knowledge and Understanding Advisors need to help clients come to terms with the changing financial landscape they will be facing as they switch from saving for retirement to becoming their own income provider during retirement. Research completed by Opinium Research LLP 2 on September 28, 2010, as commissioned by MetLife UK, asked 2,017 adults age 18 and up a series of questions regarding their understanding of retirement income. It also asked them whether their advisors had supplied them with adequate information on the topic. Some key points that are cited with more detailed research found in the appendix to this document. Looking specifically at the responses of the 808 people between the ages of 50 and 70 (close to or in retirement), the survey supports the idea that a gap exists between perceived knowledge and real understanding as they face the issues associated with generating retirement income from savings. 40% of the respondents think they understand the difference between accumulating their retirement savings and income generation from those savings. However, 42% are unclear (27% neither agree nor disagree and 15% disagree), with 18% responding that they feel this statement does not apply to them implying perhaps they are completely unprepared and without savings for their retirement and potentially relying only on government benefits. 28% of the respondents would be willing to give up access to some savings in exchange for a predictable lifetime income. This lower number demonstrates perhaps that they do not understand the potential length of their retirement, a period which could last over 30 years; a clear disconnect to their perception that they understand the difference between accumulation and distribution of savings. 55% of respondents feel their financial advisors have been helpful while they have been accumulating assets. This is good but still leaves 45% needing help a large opportunity and obligation for advisors. 40% of respondents who have advisors feel they are getting help with income generation decisions. This leaves a full 60% either not clear on the need for help, not feeling the help they are getting is adequate, or just have not been approached. 20% of the respondents thought their advisor s retirement income help included an offer to give up access to savings in exchange for guaranteed lifetime income. There is still ground to cover in being sure clients understand the risk they are facing, and the value of passing those risks on to an insurer via a lifetime annuity and/or a unit-linked guarantee product with income guaranteed. This also suggests that clients and advisors may be confusing income strategies with conventional investment strategies that do little to address the impact that market losses (i.e., sequence of returns risk) and longevity could have on retirement income.
8 8 8 Engaging Clients in a New Way Ready or (mostly) not, here comes The Retirement Paradigm Shift A record number of people around the globe are facing tough decisions on how to create a lifestyle sustaining retirement income that they can depend upon. Their readiness and ability to effectively make the decisions that are needed is likely inadequate. The challenge for clients is twofold: 1. their ability to logically analyze the complex financial factors that can affect their planned retirement income stream. 2. More importantly, how their feelings, emotions, experience and intuition come into play as they think about the problem will influence their choices. In other words, the problem is not the problem itself, rather the problem is that retirees may not know how to think about the problem. The disciplines that we taught our clients as they built a bag of cash for retirement no longer hold the same level of significance when it comes to the distribution phase of a retirement plan. For years investors have based most of their financial decisions on asset accumulation models. Savings and investments were based largely on an analytical process driven by historical performance and fund holding analysis as packaged in the form of some basic investing principles: Dollar cost averaging to help maximize savings and growth Diversification (strategic asset allocation) to help manage market volatility Rebalancing to help stay on plan This set of tools and experiences did little to help clients understand that some day it will all have to be converted into a lifestyle sustaining retirement income that needs to last as long as their retirement may last. Armed with a wealth of knowledge and experience on how to save money, retirees stand on the precipice of the rest of their lives with incomplete financial knowledge to weather the new challenges they will face during retirement a point we will dig into further along in this paper. KEY RISKS IN RETIREMENT These three risks, along with others, combine to create a complex set of issues for retirees as they begin to contemplate how to generate retirement income for a potentially long retirement. Longevity Risk A couple, both 65, have a 50% chance of at least one of them living 30 years. Life expectancy has soared in the last century and it will continue to increase. Retirement income streams that last as long as a retiree lives is critical. Inflation Risk The possibility that the income received will not cover the expenses we have in retirement means the possibility of not only lifestyle expense cutbacks but compromises on essential expenses as well. Sequence of Returns Risk The accumulation strategy of Dollar Cost Averaging (buy all the time, so down market purchases buy more shares that will grow when the market rebounds), becomes Reverse Dollar Cost Averaging (shares are sold to generate income in up and down markets, but shares sold during down markets can not grow when the market rebounds.)
9 9 Left Brain/Right Brain: How Do People Make Financial Decisions? It has been well documented that different parts of the brain are involved in different aspects of what we do and who we are. The left hemisphere of our brain is primarily responsible for analysis, fact gathering and communicating what we know. The right side of our brain on the other hand is where we act on our feelings, emotions and creativity. People do not always behave in a rational, predictable and unbiased manner. Emotions and feelings have a great deal to do with how we make decisions. Further, while each side of the brain has a distinct primary role, it is not really that one side or the other acts alone; rather decisions are made with simultaneous interaction of both sides of the brain. While this is a thumbnail sketch of what goes on in our heads, it is not a conscious process. In the simplest terms: the right brain buys (emotions, connections, belief) and the left brain justifies (facts, figures and analysis). the role of a financial professional, which is to manage this behavior. In other words, both sides of the brain the logical left and emotional right will come into play for the income decisions retirees must make in retirement. How we connect with the right side of the brain so that we can communicate with the left is very important. This idea has always been true, but we have gotten away from it. Left Brain Thinks Communicates Knows Right Brain Feels Connects Believes What does all that have to do with the decisions that need to be made for a lifestyle sustaining retirement income? Think about how some investors behaved while accumulating. Rather than follow the pure logic by buying low and selling high, more often than not they did the exact opposite (buy high and sell low). It s the emotion of greed at the top and panic at the bottom that overrides the logic that price and value are in the inverse of each other. This really is Lift art from Peanuts Char. Portfolio 2002 BE_7C
10 10 10 Engaging Clients in a New Way What the Financial Services Culture Has Forgotten In the financial services industry we have forgotten the connection piece of the puzzle. In a January 2010 article called Battle of The Brain, written by Iain McGilchrist, the author notes: Almost every function once thought to be the province of one or other hemisphere language, imagery, reason, emotion is served by both hemispheres, not one...one of the two hemispheres can come to dominate and just as this may happen for individuals, it may also happen for a whole culture. 3 In the financial services industry we have been so focused on the facts, logic and reason that we have forgotten the important role that emotions, language and imagery may play when working with clients. The advent of the first personal computer in the early eighties was the dawn of the Information Age a time when technology introduced an institutionally driven focus on the analytical thought-process. Laptops, spreadsheets, illustrations and the Internet allowed companies to bombard clients (and advisors) with all the information they needed to make a logical and mostly price-based decision for all things financial. This approach put a premium on a train of thought focused on communicating the facts to clients in a way that was narrowly reductive and highly analytic. While this thought process is still important, it is no longer sufficient. This methodology often failed to connect with clients in a comfortable and meaningful way. Note that there is no evidence that the information age changed the way consumers make financial decisions. Rather we, as an industry, changed how we approached them about their financial decisions. People don t always make their decisions predicated on what makes sense. A 2008 UK study 4 concluded the information-based approach...is likely to have only a modest effect in improving outcomes. In the end, people can only absorb so much pure information. Yet, we continue to bombard them with information. Even if people know and understand the facts, they may still have made poor decisions due to the inadequacies of the financial tools available. From information to conceptual According to Daniel Pink, author of A Whole New Mind 5, the financial industry placed too much emphasis on the numbers because on the surface the solutions looked as though they made sense. He goes on to tells us that the pendulum is coming back to the center and we are moving from the Information Age to the Conceptual Age. While the domain of the left brain and the analytical tools it relies on are clearly important, the creative and emotionally connected domain of the right brain is required to effectively make any decision. Further physiological proof for this can be found in the landmark book, Descartes Error: Emotion, Reason, and the Human Brain. 6 Neurologist Antonio Damasio presented the argument that rationality requires emotional input. He studied people with damage to the part of the brain that generates emotions. The subjects all maintained the ability to think, just without the ability of emotions. His conclusions: Decision making was seriously impaired and the contribution of emotions, feelings and intuition are required to make choices.
11 11 Lift art redrawn by LoBianco Studios 1/00 In the emerging field of Behavioral Finance, observers have now recognized that accounting for the sometimes illogical and internal factors that drive individual decision-making needs be considered when addressing financial decisions that clients make. It s not that the logical analytic approach is incorrect, rather it only serves to communicate the facts and fails to connect the decisionmaker to the personal importance and essential emotions that shade most decisions we make. From a business perspective, this is not just nice to have. It s what helps advisors connect with clients and it may well mean the difference between success or failure for clients. How many times have you heard, How do you take the emotions out of financial decisions? The answer is you don t you accommodate them. A 2009 LIMRA research report 7 compared a standard fact-find and analyze sales approach, with a sales approach that focused on clients feelings first and added facts along the way, with soft questions such as how do you feel about the investments you have? This led to a 29% higher likelihood to buy after experiencing the process. Implementing behavioral approaches that accommodate the emotional elements in client decision-making opens up new ways to serve clients more fully. That leaves us with the big question to answer, How can we accommodate the right brain-driven emotions as we approach clients and help them create a lifestyle sustaining retirement income? Behavioral Finance a field of economics that studies how the choices we make are influenced by factors beyond the logic of the situation.
12 12 12 Engaging Clients in a New Way Three Behavioral Ideas to Consider: Framing, Loss Aversion and Experiential Bias Let s take a look at three behavioral ideas and related research. This will perhaps explain some of what may be going on in the minds of those making retirement income decisions, and set the stage for how we might approach retirees with their retirement income decision. 1 Framing We have always framed our money and savings discussion with clients in terms of return on investment, growth and the resultant size of the bag of cash. We rarely frame money discussion in terms of the income that will need to be generated. Framing means that we seek to describe the issues in terms of the real consequences to which the client can connect. How we frame questions to investors will affect their choices. But as they enter retirement, retirees become less an investor and more their own income provider. Before they can make educated decisions about retirement income, they need to comprehend the scope and consequences represented by the problem as reflected in the way we frame the information we provide. The National Bureau of Economic Research (NBER) investigated the role of framing lifetime income solutions in a 2008 study. 8 The research was very thorough, and it demonstrated some important keys to discussing retirement income. Study participants were exposed to a series of actuarially equivalent statements concerning a hypothetical $100,000 the consumer had available for retirement income purposes. Half of the participants were presented a series of actuarially equivalent statements that focused on the amount of income generated and duration of that income. The other half of the participants were presented the same series of actuarially equivalent choices, but in terms of the asset value and the rate of return generated. The vast majority of those presented the option in terms of income and duration (72%) chose the lifetime annuity because it provides the highest income for the longest duration (lifetime.) However, when presented the same set of choices in terms of asset value and rate of return, the reverse occurs. Only 21% chose the equivalent of the life annuity. The study concludes that framing is very important to presenting lifetime income options. It then goes on to hypothesize that the income framing approach leads to the life annuity choice because it represents a valuable form of insurance income as long as one is alive no matter how long. While the opposite is true in the investment framing approach because in investment terms the life annuity equivalent is viewed as a risky asset because of the uncertainty of living long enough to achieve the results. Similar outcomes were observed in the MetLife U.S. Business Marketing Research survey 9 that was completed in October ,858 Respondents ages of 45 and up were asked to respond to two sets of questions regarding retirement income and savings. One set framed as an income decision and one set framed as an asset decision. Out of the 1,858 respondents: 600 were years old 644 were ages years old 614 were age 65+ years old
13 13 Focusing on the 614 respondents who were age 65 plus, we see in the first set of questions that when focusing on income and income duration, the majority (70%) prefer a predictable retirement income check each month. Alternatively, when the same group is asked the same basic questions, but framed in terms of asset value ( having the flexibility ) and control ( giving up access ), the responses shift in favor of assets control over income level. Question Set A: Income Orientation, Age 65 Plus Responses Positive Response to Q1 Positive Response to Q2 30% 70% Q1) Having the flexibility to use my retirement savings to generate the income I want today is important to me, even if it means I risk running out of savings and having no income later. Clearly language plays an important role when addressing retirement income planning. Speaking in terms of income, income reliability and income duration will help retirees focus on the importance of income as opposed to preservation of asset value.* This also supports what we see in the earlier MetLife UK study. Consumers have a lack of understanding of various solutions for retirement income and what they really mean to either asset value or income sustainability. When framed correctly, we can surmise that people recognize the importance of an income stream, but without that language they are stuck in an accumulation mindset where their decisions are based on asset preservation and growth. This leads us to a second Behavioral Finance idea Loss Aversion. Q2) I prefer a predictable retirement income check each month, like a paycheck, even if I give up some of my ability to take more income if I need it. Question Set B: Asset Orientation, Age 65 Plus Responses Positive Response to Q1 Positive Response to Q2 61% 39% Q1) It s important for me to have a large portion of my retirement savings available at all times even though that may mean less income is available throughout my retirement years. Q2) I would be comfortable giving up access to my retirement savings in order to receive the most income possible. * While not studied in great detail, a point worth mentioning: With question set A, results from Snoopy all ages with were laptop.ai weighted towards Q2 and the importance of income during retirement. However when the asset-based questions are posed in question set B, more of the younger respondent group, a slight majority for ages 45 55, were willing to give up access to their savings in exchange for a reliable income. This may be attributed to the younger boomers sensitivity to income streams due to the loss of pensions they witnessed their parents had, negative predictions in the media and recent market events.
14 14 14 Engaging Clients in a New Way 2 Loss Aversion In the MetLife study you will note that in question set B (the assetbased set), asset control concerns expressed in Q1 gets the nod. Stated another way, and in line with an investor s accumulation experience and mindset, the feeling that you are not losing your assets is more important than income. This is because we value gains and losses differently. Choices that are expressed in terms of possible gains are favored over those expressed in terms of possible losses. One of the most cited papers in economics is Daniel Kahneman and Amos Tversky s Prospect Theory: Analysis of Decision Under Risk (1979) helps us look at this concept. This ground-breaking study illustrates that people tend to be irrationally risk tolerant in protecting capital and that losses have a higher emotional influence even if the gains equate to the same value. In this study, participants were first told that they have $1,000 and must pick one of the following choices. Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500. An overwhelming majority of people chose B as their answer. The certainty of a gain, although smaller was more appealing than the risk of gaining nothing even with the opportunity to gain more being present. When the question is modified in terms of a loss as opposed to a gain we see the opposite results. Participants were then told that they now have $2,000 and must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500. In terms of the amount of money one might end up with, both A and B in the second set of statements are the same respectively as A and B in the first set of statements. But in the case of the second set of statements, most of the study participants chose option A. It would appear that people tend to prefer the possibility of losing nothing over the certainty of losing something, even though the amount of the loss in statement A clearly leaves you with less money than the certainty of loss in B. The implication is that people weigh their decisions unevenly between gains and losses. In other words, losses loom larger than gains. We must help clients comprehend that retirement planning is no longer based on asset value which they fear losing based on the experience and training we have provided them with during their accumulation years. Rather, success in retirement must be measured by the ability to enjoy a lifestyle sustaining retirement income. It is now an issue of not running out of income, even if savings are completely depleted.
15 15 3 Experiential Bias. The third idea we will look at is Experiential Bias. This means that as we gain knowledge and experience in a given area, future decisions we make are influenced by our past experience. So we tend not to go through all the rigors that a logical analysis might dictate since we are confident in our experience. This can create a problem especially if we find ourselves making what we perceive to be a similar decision (i.e., financial), when the data, facts and logic have changed (as is the case when thinking of a saver s accumulation experience as applied to the new paradigm they are facing during distribution). Accounting for such behavioral factors is amplified as people age. In August 2008 the Federal Reserve Bank of Chicago studied consumers decision-making performance on several financial oriented decisions. They then plotted their results against Experiential Capital a measure of one s level of experience making financial decisions and Cognitive Capital a measure of one s ability to analyze information to support their need to make a financial decision. When we are younger we tend to have more cognitive capital and are more receptive to analytical information, and employ it when making financial decisions. As we age we tend to lose cognitive capital (one of the joys of aging), and we tend to rely on our long-standing experience to make our decisions. As indicated in the chart below, our cognitive capital wanes and our experiential capital builds as we age. We reach a point of maximum decision making capability after which our decision making performance slowly declines. Apply this to the decision that a retiree needs to make and you have a recipe for disaster. As we hit retirement and become our own paycheck provider, the rules and risks have changed. Analytically speaking we require a different set of facts, data and analysis to solve the new problem of generating a reliable lifestyle sustaining retirement income. Unfortunately, at this critical moment, there is a good possibility that we will intuitively rely more on our long-standing financial experience that is related solely to accumulation. In conclusion, a retiree s experience and fear of loss, and our habit of framing things in terms of assets instead of a reliable lifestyle sustaining retirement income, means we are not connecting with our retiring clients in a way that supports the decision they have to make. If we do not change the way we connect with them, it will be all the harder to help them understand and learn the new language of retirement income that they need to achieve retirement success. Cognitive Capital Task Performance 53 Age of peak performance Experiential capital Performance Analytic capital Age
16 16 16 Engaging Clients in a New Way A New Thought Process: Connecting with Clients Retirement Income Mindset Clients will not buy a product, but a process a thinking process that will allow them to reach a solution. Having a client participate in the decision-making process helps them understand and address the issues that impact them. Dan Sullivan, a well-known industry speaker and strategic coach There is more than just information and logic involved. We need to reconnect with our clients in a different way by taking a different approach: One that they can relate to, one that gives them an opportunity to learn at their pace and one that involves them in the process of determining their own solution. Let us attempt to connect to our clients by involving them (and by asking them about their feelings, emotions, and instincts) in the process and let s focus on the heart of the matter income. Further, let s ask clients how they feel about a lifestyle sustaining retirement income and how its value is compared to access and control. And finally, let s provide them with an answer that first seeks to echo what they have expressed is important, then follow with examples of the income (not asset value or rate of return) they might expect given a proposed allocation of their savings to various financial vehicles also know as product allocation. Putting some of the findings of behavioral finance to work, financial advisors need to develop a line of questions that allow individuals to react to a range of statements that cover the spectrum of preferences, from a fully guaranteed income to actively managing one s portfolio through retirement. As clients respond to the questions, a clearer picture emerges of their personal income mindset and comfort level. The results will help construct a retirement income strategy that will become clearer, and the emotive, expressive aspect of personality and preferences can be wedded to the more analytical side. A financial advisor will be in a stronger position to more easily determine how well the three product categories systematic withdrawals, variable annuities with guaranteed living benefits and income annuities fit into a solution that will help manage the three primary retirement income risks: longevity, inflation and sequence of returns. What Is Product Allocation? There are three major financial and insurance categories for consideration when creating a retirement income strategy: 1. Systematic withdrawals from traditional investments high in liquidity and flexibility, but also high sequence of returns risk that must be borne completely by the individual. 2. Variable annuities with guaranteed living benefits providing both market access and guaranteed income by helping clients balance their need for access with their need to pass on some risk 3. Income annuities (Single Premium Income Annuities and longevity insurance) that provide income for life with all the risk falling on the shoulders of the insurance carrier. How much clients should allocate to each category or product type will depend on their personal and financial goals and unique situations.
17 17 Flexibility Versus Guarantees: Helping Investors Decide This is not an either/or choice. An investor who understands the new retirement risks and who is able to frame solutions in terms of their feelings about receiving a steady income and/or the need to maintain control and flexibility over their savings, will be better suited to participate in the creation of their unique retirement income strategy. While these five questions represent only a part of the questions we will need to ask to get a good estimate of the client s retirement mindset, they represent a good example of what s important. Notice how the questions provide a framework: First, we focus on income, not asset value. Second, each question states something positive about guaranteed lifetime income or control and flexibility over one s retirement savings. Then the question goes on to point out the tradeoff that comes with that positive attribute. Let s look at some example questions we might ask at the front end of our process to get the client thinking about income. 1. I prefer a predictable retirement income check each month, like a regular paycheck, in exchange for giving up some of my ability to take more income when I may need it. 2. I don t want to worry about the ups and downs of the market after I retire and the effect on my income, even though I may miss out on opportunities to increase my income level if the market goes up. 3. I am much less concerned with how long my retirement funds last and much more concerned with living my desired lifestyle in my earlier retirement years. 4. It s important for a large portion of the income generated from this account to last my entire lifetime. 5. I would be comfortable giving up access to this money in order to receive the most income possible. Agree / Disagree Agree / Disagree Agree / Disagree Agree / Disagree Agree / Disagree Further, we seek to get at the gut feeling the client has by providing an agree or disagree choice only not a series of choices they must analyze and think about. also note how we address potential internal conflicts with their decision by asking the same thing with different framing (question 1 and question 5). Finally we suggest that a score based on a simple one-point system be used to move us across a spectrum of profiles, starting with someone who may lean heavily towards more flexibility (left) to someone who might have a strong leaning towards lifetime income (right). FLEXIBILITY Products with market growth GUARANTEES Products with guaranteed income
18 18 18 Engaging Clients in a New Way What s Your Retirement Mindset? Now that we have found out how the client feels about the tradeoffs between lifetime income and asset access/flexibility, we play back to them their retirement income mind set. The goal of which is to get them to feel connected to the type of income outcome that might make sense and feel right to the client. It will provide you, as an advisor, with the opportunity to discuss their results in other than pure financial terms and understand how they feel. For example, someone who indicates through their answers to the questionnaire that they want a balanced approach (typical for many clients), might have a retirement income mindset like this: your Answers show that you value flexibility and guarantees of your money. You are willing to give up some control for a predictable income stream. You would also like to be somewhat involved in the management of your investments. Based on your answers, the combination of investment options that may be most appropriate for you, would include balanced amounts of various withdrawal options and lifetime income guarantees. How Much Income Can I Get? Finally, we suggest to them a product mix that might suit their mindset. Mind you, there is nothing set in stone here, rather we are finding a starting point for us and the client to define together a retirement income strategy that will feel right for them. Also note, in our examples, that we express things in terms of income and the amount that will be guaranteed for life (not assets and rates of returns). We also show them the full range of starting points so that they can see that there is a range, there are choices, and they can model something other than the specific results associated with their mindset. Sample of Presentation Method of Possible Starting Incomes Products with market growth Products with guaranteed income Hypothetical Income Mix Generated Based on Product Allocation Traditional Investment*: $3.06 $2.45 $1.78 $1.22 $0.70 Guaranteed Income Products**: $1.10 $1.97 $3.12 $4.18 $5.24 Total: $4.16 $4.42 $4.90 $5.40 $5.94 % Guaranteed for Life: 26% 45% 64% 77% 88% * traditional investment includes stock, bonds, mutual funds, savings, etc. in any suitable combination such that a Monte Carlo analysis would yield a safe initial withdrawal rate that allows for 3% inflation of initial income withdrawal and a 90% chance of success of the desired years of retirement income. For example, assuming a moderate investment mix would support a roughly 4% withdrawal rate over a 30-year retirement income period with 3% inflation and a 90% chance of their being at least $1 of savings left at the end. ** guaranteed income products would include Single Premium Immediate Annuities, Variable Annuities with Income Guarantees and Longevity Income Guarantee Annuities in any suitable mix the client and issuing company(s) may allow.
19 19 In Conclusion Your Advice Is Needed In the United Kingdom retirement income/advisor survey mentioned earlier, people between the ages of 50 and 70 are, in general, comfortable with their advisor relationship. The question is will they remain as content with their advisors as they approach the retirement stage of life? According to a 2009 LIMRA report, The Advisor for Life, over 40 percent of consumers feel they need more professional financial advice today and think this need will continue to increase over time. Most consumers expect advisors to educate them and help in retirement planning including monitor progress toward achieving their financial goals regardless of life stage. More important, as a financial advisor, have you provided guidance to your clients that will help them efficiently generate an income stream when they will need it the most? As clients move through life stages, their needs for protection and accumulation products will change. Age also has an impact on how your clients perceive financial products as suggested by the US market research. But a great many people are ill informed about the new retirement risks and what it means to shift from an asset accumulation phase to a distribution phase. How many people, especially those closer to retirement, understand that they can insure their income? Today s conventional wisdom might be that client satisfaction is driven primarily by portfolio performance. But asset accumulation decisions are high frequency and generally, low impact, because you can modify your strategy along the way. Income decisions are more critical because they are low frequency and high impact, because you are less likely to change course once a choice has been made to establish a future retirement income stream. Lasting client relationships will rely on engaging clients about the new retirement risks and helping them participate in a decision making process that makes them feel better about the retirement income options they choose. This may require a willingness to work with a client s tax and legal advisors who may have an influence on the decision-making process. It s another opportunity to connect with your clients in a meaningful way. You cannot wait for your clients to ask questions about concepts they were not taught to think about. What we can derive from the recent US and UK studies is that people perceive they understand the difference between growing assets and generating income, but they may not understand how much income they will actually need or the impact of the new retirement risks. A significant number of our survey participants considered many retirement income issues as not applicable. In some cases, that may be true, but it also reveals the disconnect people have to the new retirement paradigm. This brings us back to what was said earlier: the problem is not the problem itself; rather it is that retirees may not know how to think about the problem. Forging a strong client relationship and ensuring your client s retirement income needs are met is a combination of a financial advisor s knowledge regarding income options and ability to deliver on the solutions offered. INSPIRING PEOPLE TO TAKE ACTION Remember what your strengths are: In the financial services industry, the most valuable resource advisors have is their ability to bond with clients and that means understanding the difference between left brain and right brain concepts. Today s advisors will need to transform the way investors think about protection and retirement needs, if they have any hope of inspiring people to act on their best intentions. Clients may be more receptive to a thinking process that helps them understand the issues and makes them feel good about their decisions. Clients take actions they come to on their own based on emotions, feeling and experience, not just the facts. People want to buy a thinking process, not just a product. They need to be part of the process. The problem is not the problem, it s that people don t know how to think about the problem.
20 20 20 Engaging Clients in a New Way New rules in client engagement: Go beyond the typical fact finding process. Ask about a client s personal experiences relating to the new retirement risks, which tend to offset the general adversity toward protection products. Give your clients a voice in the decision making process. Incorporate questions into your client meetings that address how they feel not just how they think. Help your clients react to the emotional side of the decisions they are making. Share stories about others in a similar situation and life stage as your client who benefited from risk protection products. Develop financial tools or processes that provide simple guidelines and not necessarily the ultimate answers. Remember, the idea is to drive awareness about the retirement income risks and guide clients to their own decisions. Avoid talking in terms of asset value and focus on the paycheck. It s much easier for people to grasp benefits and premiums when placed in context of a budgeted expense Snoopy w/globe.ai
Getting Ready to Retire: What You Need to Know About Annuities Table of Contents A. Planning Your Retirement Income ------------------------------------------------------------------------------------------------------
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