The nature of financial advice is changing as the large Baby Boomer demographic confronts retirement. Suddenly, many conversations with clients are shifting rapidly beyond wealth management to topics related to this new stage of life.
Advisers have an opportunity to start discussions about estate planning, powers of attorney, enduring guardians and aged care. Planners clearly need to take the steps necessary to ensure they are equipped to have these conversations.
Association of Financial Advisers national president Marc Bineham says estate planning is the number one issue for Baby Boomer clients now that most have hit retirement age.
As a result, estate planning should be a booming practice area for planners, even though some related services they can’t provide. For example, since Baby Boomer clients are often still busy with their lives, an adviser can help them source a good lawyer, to prepare a will, and an accountant.
“Planners can position their practice so it’s a one-stop shop for their clients, which gives them a lot of comfort,” Bineham says.
Estate planning includes considering what will happen when a client dies or loses cognitive capacity. This involves an assessment of the client’s personal assets, super – particularly if they are a trustee of a self-managed super fund – shares, trusts and business assets.
“While financial planners can’t prepare the legal documents, they can help their clients consider issues such as who will operate family businesses,” says Greg Einfeld, managing director of SMSF specialists Lime Super.
“[Clients] have worked hard to accumulate their wealth and now they have adult children and are concerned about how to transfer their wealth to the next generation, especially when their children get married,” Bineham says. “They are often worried their wealth could be split if their kids get divorced and they want to put in place mechanisms to reduce this risk.”
Other considerations include: which assets are best suited to which family members; ensuring beneficiaries are treated fairly; and deciding who will control family trusts. The establishment of testamentary trusts and who should have power of attorney in the case of incapacity are other factors to consider.
“What events should trigger business partners being able to buy and sell their shares in the business to each other and at what price, and how this is funded, must also be taken into account,” Einfeld says.
Financial planners are well placed to help their clients work through these issues because they have a good understanding of their overall financial situation and family structure. Einfeld says: “Many clients find it helpful to have their financial planners and lawyers work on these issues together.”
Estate planning also includes tax minimisation, using instruments such as reversionary pensions and re-contribution strategies. Einfeld stresses that these should be part of regular conversations with clients.
Rhiannon Kanoniuk, director of financial planning firm Pekada, says uncovering a client’s estate planning goals is a natural progression from the deep questions asked to establish the financial and lifestyle objectives that are a core part of the planning process.
“Advisers working with [clients’] estate planning lawyer, assisting clients in answering these questions, is an integral part of a lot of financial plans,” Kanoniuk says.
She explains that it falls to advisers to educate clients around who can receive a super death benefit and to talk through strategies that may help them achieve their overall estate-planning goals and potentially save their beneficiaries thousands of dollars.
Australian Executor Trustees technical services manager Julie Steed agrees estate planning is one of the cornerstones of a financial plan.
“There’s little point in developing a fabulous wealth creation path if you don’t deal with the distribution of that wealth on the client’s death or in the event they are disabled or incapacitated. So, powers of attorney are just as important as the will.”
Steed says anyone with an SMSF should have a will and powers of attorney in place. “Clients often have really good relationships with their accountants and their financial planners. But in Australia, we don’t have that same ongoing relationship with a lawyer.”
To get around this, Steed says, some financial advisers will arrange for four or five clients to come into the office on a day to meet an estate planning lawyer, which also ensures the financial adviser remains in the loop.
Steed says engaging the next generation can also be valuable, especially to help retain the family’s business over time.
Plan for aged care
Before clients require aged care, it is important to understand how much needs to be saved to fund this expense. This is where a great financial planner comes in.
“Aged care can vary in cost, depending on where and how the client plans to live,” Lime Super’s Einfeld says. “This will [figure in] the trade-off between spending, saving and retirement age that feeds into the cost calculation.”
Once the client is ready to move into an aged-care facility, planners can advise on the costs of the move, whether assets should be sold to fund aged care and the benefits of making a higher upfront payment versus ongoing payments.
As Kanoniuk notes, aged-care planning can cause stress and heartache for clients’ loved ones. “So while you may not be able to plan down to the final details in every case, discussing and documenting the wishes of the client and their family at least at a high level can really help, if and when the time comes to move the client or their family members into aged care.
“Talk to them about the options for funding their care and likely ongoing fees based on their financial situation.”
Bineham expects aged care will become an area of specialisation for financial advisers.
“This is an emotional area and advisers need to develop empathy around this. In financial advice circles, we often refer to it as ‘the conversation.’ “
He says elderly people sometimes decide the only way they will leave the family home is in a box. But that can mean being ill-prepared when their health deteriorates and they are no longer capable of living in the family home or, worse, making their own decisions.
As Bineham says, “Don’t leave this discussion until after the client breaks a hip and is told they won’t be able to return home.”
Steed says aged care is mostly an issue for Baby Boomers’ parents at this stage.
“And it tends to be reactive,” she explains. “People don’t sit down with their parents and talk about aged care. The discussion tends to happen after mum and dad need help. It tends to be: ‘Mum’s had a fall, now what do we do?’ ”
She says financial advisers have a role to play in calculating fees and working out the right strategy. “Having an independent third party who’s assisting with the process can be priceless in deflecting the emotion of those transactions.”
Advisers also have a role, she says, in explaining how home-care packages work and proactively raising the potential sale of the family home.
“Advisers can help clients not to be sentimental about something that has the capacity to be sold to provide a much better lifestyle for the aged-care recipient,” she says.
Decisions on SMSFs
Any advice given to SMSF trustees must touch on the plan for control of their fund should they become incapacitated or die.
Kanoniuk says: “Ideally this needs to happen right from establishment, with choosing an individual or company trustee. Any adviser who has had to assist a grieving spouse in changing from an individual to corporate trustee knows [it] should be seriously considered well before the death of a trustee.”
This should be followed up by forming detailed plans as part of the overall estate plan – especially nominating powers of attorney who can step in as a trustee in the event of incapacity.
“As advisers, we can recommend these steps are taken with an estate-planning lawyer, but what’s tricky is communicating the importance to the client of getting these set up,” Kanoniuk says. “Luckily, there are many services now that can allow advisers to maintain control over the client experience and ensure these documents are in place, rather than just hope a client implements your advice,”
Clients in their late ’70s and early ’80s are often concerned about what will happen to their SMSF if they don’t have the legal capacity to manage it.
“ASIC has very clear expectations that if you’re giving advice on establishing a self-managed super fund, the Statement of Advice must contain information on the instances that may lead to the SMSF being wound up, including what the alternatives are and likely costs,” Steed says.
There are many other services financial advice firms can add to their quiver to help support Baby Boomer clients.
For instance, it’s easy to assume only younger generations require detailed advice on cash flow and budgeting as they navigate the wealth-accumulation years. But it’s just as important in the drawdown years to ensure the asset base lasts the distance for a comfortable retirement.
“Some clients can vastly underestimate their expenses leading up to retirement,” Kanoniuk says. “So tracking bank account and credit-card expenses can be a real value-add for some.”
Legislative changes are also often a trigger for advice practices to tweak their service offerings. For example, since super contribution rules have been tightened, clients are increasingly looking at alternative tax structures and insurance bonds as a way to manage and transfer their wealth. So there are opportunities to have conversations with clients around these and similar topics.
“Plus, a lot of clients are looking to transfer wealth before they die, but still retain control of it,” says Steed, who thinks clients are interested in learning more about how to do this.
She says clients are increasingly skipping a generation in terms of estate planning and wealth transfer, and bequeathing funds to their grandchildren to help them enter the property market. They may need assistance with this, too.
“Clients who have maxed out their non-concessional contributions have been looking for alternatives and we are seeing more of them consider how to help their grandchildren, given it’s much harder to get a start in the property market now,” Steed explains.
Philanthropy is also becoming more popular, again especially when clients have contributed the maximum amount to their super fund each year.
“In the past, clients would need to have contributed $1 million to a charity or charitable trust to make a difference to their tax bill,” Steed says. “Now they can reduce their tax with much smaller contributions to a public ancillary fund.”
The financial advice environment will continue to shift as Baby Boomers get older and their needs change. This will provide ongoing opportunities for advice practices.
The onus is on firms to have processes in place to continue to adapt and take advantage of the new advice landscape to ensure the practice is financially sustainable and its services remain relevant.