The opportunity for advisers who are prepared to skill up and specialise in retirement advice is immense, but not without its challenges, a roundtable discussion involving experts including licensees, practitioners, product designers and researchers, reveals.

Retirement advice lends itself to exploring deeper relationships with clients and positions specialist advisers as primary relationship owners, the experts concluded.

Robert DeChellis, Allianz Retire+

“About a year ago, I asked a group of advisers, top advisers, a question I’m sure they weren’t expecting, which was, ‘How many of you have ever seen your clients cry?’ And this is not relating to investment performance or anything like that, but just to cry for something that really mattered. And it was only two hands out of 30 that went up,” Allianz Retire+ consulting retirement specialist Robert DeChellis said.

“If you haven’t seen your clients cry, you really are not close to the things that matter to them and they really have not opened up and been vulnerable.”

Because of the nature of advice in retirement – given the complexity of the issues clients are navigating and the likelihood clients will reduce the number of advice relationships they have at this stage of their lives – specialist retirement advisers are better placed than anyone to create these more emotional relationships, he reckoned.

“Our advice practices specialising in retirement, they talk about being a lead adviser, and a lead adviser is someone who can be the centre of that client’s universe and be the project manager, conductor, CFO, whatever language you want to describe, but have a very clear view over their entire balance sheet,” Fitzpatricks Private Wealth group advice executive Matt Fogarty said.

Fogarty joined DeChellis and other industry leaders at a recent roundtable discussion in Professional Planner’s boardroom in Sydney recently.

This lead adviser strategy is prevalent in the retirement phase, where clients, on average, reduce the number of advisers they work with, DeChellis said.

Go Deeper

“During the accumulation phase, we talk about investment need, we talk about risk profile, we talk about boxes and we talk about portfolios…In the retirement stage, it’s a much more complex issue. It’s a needs-based issue and the thing that resonates to me the most is it’s about liability pension issues more than it’s about investment issues or, equally, start with the liability first, then let’s worry about the investment part of the equation,” said Tim Wedd, an executive director at planning practice Crystal Wealth.

Tim Wedd, Crystal Wealth

“When people get to retirement, they often think they’ll start with about $10,000 a year in an index for two or three years and that’s your inflation assumption and everyone’s going to have a nice time and go off into the sunset. The reality is, I could spend $20,000 a year for the next five years because I need to go on a boat cruise every year. Then I might drop $30,000 more because I’m going to have a wedding for one of my kids and all of a sudden we’ve got this completely different liability.

“And all that’s probably going to change along the way and that’s where the value starts to come in because you know how to try to think about all that,” Wedd said.

Now is the time to specialise in retirement advice, said experts around the table who are either specialists or have identified the area as a potential area of specialisation.

However, what’s been missing to date is collaboration across the industry to solve the challenges that have been restricting implementation of retirement advice, such as lack of product innovation and rigid portfolio construction techniques, said Caitriona Wortley, Allianz Retire+’s head of distribution.

“Dealer groups, researchers, platforms and product providers all need to come together to address what is essentially a lack of frameworks and solutions to address the specific challenges of retirement and focus on retirees,” she said. “Within retirement, we need to stop using volatility as a measure of risk but focus on risk being the likelihood of running out of money too early.

“We’ve seen a huge amount of focus and innovation on the accumulation phase but you’ve got to start looking at retirement. Yes, there’s been some innovation, but the solution set is just not adequate. Everything is still so focused on accumulation style products, where the investor takes all the risk singlehandedly and that needs to change,” Wortley said.

A lot of retirees tend to be confused because there’s so much information out there, said Brendan Whitehouse, a principal adviser with BRW Financial Group, based in Sydney’s inner east.

Time to innovate

“The reality is there hasn’t been a lot of innovation in this area to date so it’s really refreshing to see some innovation in the retirement space as far as products are concerned. So very excited to see this develop further and see what happens from here, but I think it’s a breath of fresh air,” Whitehouse said.

Brendan Whitehouse, BRW Financial Group

“A lot of clients I see are living a lot longer, many of them might not be financially literate; their parents are living into their 90s or even to 100 now and they’re 60, 70 before they’re getting inheritances. So, they’re getting these great big lump sums later in life and they’re wondering what they do with them. They can’t get into the super system. What options do they have and how long is their money going to last?” Whitehouse continued, describing the challenges from the front line.

Data from institutions, superannuation funds and via research conducted by wealth management businesses about the spending habits of retirees gives frontline advisers more information than ever; for example, the details of client behaviours are giving advisers deeper insight, which is helping them construct more personal and valuable relationships, the experts agreed.

“Analysis we have recently done with clients in retirement shows that many clients are drawing down the minimum amount, regardless of what age bracket they’re in,” Centrepoint Alliance head of research Miriam Herold said.

Allianz Retire+’s DeChellis pointed to a study from investment firm BlackRock last year that showed people were prepared to reduce their quality of life in retirement out of fear of spending the principal.

“So, they’re happy to spend dividends,” DeChellis highlighted, based on the research.

“They’re happy to spend interest. They’ll spend rental income. But if you ask them to sell that piece of property, liquidate that stock versus taking the dividend, they would much rather reduce their quality of life.

“Even though, if you look at it mathematically and say, ‘You’re 83 years old, if your life expectancy is another 12 years, just divide that number by 12 in the stocks that you own, and you’ll be able to take that cash flow.’ It makes sense to be having that conversation but it’s not a place they naturally want to go.”

Paul Saliba, founder of investment consulting business Evolutionary Portfolio Services, added: “My mother-in-law is an example. She has quite a bit of money, she’s 77 years of age and she doesn’t spend the money that she can.

“And then when I say she can afford to spend the money, she says she doesn’t want to spend all the money, she wants to leave it to her son and her daughter. Well, that’s great, but you don’t have to live like a pauper, but people do that. People just handle life as it comes because it is radically uncertain.”

Saliba noted that this example was common among the clients of advisers specialising in retirement.

The right solutions

Outside of the conversations advisers are having with their clients, risk-profiling and product selection present separate challenges for practitioners, as many who have specialised in retirement will be aware has been the case in the past.

Miriam Herold, Centrepoint Alliance; Tim Steele, NAB FP

Tim Steele, National Australia Bank’s general manager of financial planning, said: “While we have a very unsophisticated approach today to helping people understand their risk tolerance – as I think most people will agree – I think what’s most exciting is using data to understand past behaviour as predictive of future behaviour, and that, to me, is where we start to think about how we help people manage their asset and liability challenge, which I agree is a massive maths problem.”

Products, too, have some ground to make up to provide solutions for retirees, in terms of both cost and design, the participants commented.

“I think back probably four or five years ago now, the Financial System Inquiry acknowledged and identified that superannuation assets weren’t moving into, or weren’t converting into, retirement income streams, which is largely due to a lack of risk pooling and also the products available,” Lonsec executive manager for investment consulting, Michael Elsworth, noted.

“I think what’s been happening is advisers have been dealing with products and trying to finesse existing products to meet the requirements of retirees, which are very different to [those of] accumulators… I think there has been a perception that there haven’t been enough products specifically designed to mitigate the major risks in retirement – longevity, sequencing, inflation risk.”

“Most people are risk averse, but for many retirees, to lose 10 per cent would be catastrophic,” Centrepoint’s Herold noted. “If you are able to put your client into the type of vehicle that has a floor, where you could never lose that much so you could never have that strong reaction, it might encourage people to move up their risk profile or investment profile to more aggressive assets.

“We did a lot of analysis and overall we found people liked the idea of [drawdown] protection, but they’d had negative experiences with the cost back in history, in particular where life insurance companies have been very expensive, upwards of 2 per cent, which was not palatable.”

Retirement is an interesting space to try to construct the portfolios, Crystal Wealth’s Wedd said.

“I think it’s going to move very much away from the one-size-fits-all, where there’s all that focus on the accumulation and the discussion is about: ‘Here’s a risk profile, put the money in, fund managers will do the rest and then we’ll worry about the detail later,’ ” he said.

“Instead, you’re dealing with completely the reverse, where the conversation is more like: ‘I’ve got real problems, I’ve got real cashflow needs; maybe the kids haven’t left home, maybe my older parents are going into homes and I’m trying to grapple with all of that and now I’ve got to deal with a market-based system, a company and market-based system, not a defined-benefit system.’ This type of advice is a major shift.”

Business models will need to evolve and adapt to accommodate retirement portfolios that are constructed now with a different objective, instead of just having portfolios that are designed for accumulation, DeChellis noted.

“We’re experiencing the greatest level of disruption that we’ve ever seen as the industry adapts to servicing the retiree,” he said. “But I do believe with that disruption comes some pretty significant opportunity.

Smith is the editor of Professional Planner’s print and digital platforms. He is an experienced financial journalist, editor and multimedia producer who has held senior editorial positions both in mainstream press and trade media.
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