Mutual fund companies catering to the first wave of baby boomers, now nearing retirement, may be neglecting younger boomers who have many more years of work still ahead of them.
Mutual fund companies catering to the first wave of baby boomers, now nearing retirement, may be neglecting younger boomers who have many more years of work still ahead of them.
The 41 million second-wave boomers — born between 1956 and 1964 — are just 42 to 51 years old, and still focused on accumulation.
"Fund companies are doing a poor job meeting their needs," said Bruce Harrington, managing director for Cogent Research LLC, a Cambridge, Mass., marketing research firm specializing in financial services.
Fund companies focus on the 37 million first-wave boomers, who are between 51 and 61 years old, Mr. Harrington said.
"There's almost an arms race to develop products around retirement income," he said.
The older-boomer focus is even reflected in the pitchmen chosen by mutual fund companies to peddle retirement products and services.
Last year, for example, Minneapolis-based Ameriprise Financial Inc. signed "Easy Rider" star Dennis Hopper as its pitchman. Also last year, Fidelity Investments of Boston recruited former Beatle Paul McCartney to lend his 1960s bona fides to its funds. While both are icons for older boomers, the celebrities were already born when the baby boom began: Mr. Hopper is 71, and Mr. McCartney is 63.
Although the average amount of investible assets for first-wave boomers ($998,466) is greater than that of the second wave ($731,777), younger boomers will be accumulating wealth for many more years, Mr. Harrington said. Calling them the "lost generation," he said second-wave boomers constitute an attractive — and distinct — market for mutual fund companies.
"Treating all boomers the same is a fallacy. Fund companies should be treating them as investors looking for different things," Mr. Harrington said.
He contends that second-wave boomers want products that give them a reasonable level of return without volatility. To some extent, life cycle and target date funds meet their needs, Mr. Harrington said. But such investments are not the perfect solution. One possibility might be combining the best attributes of target date funds and variable annuities, he said.
Despite opportunities among second wavers, the fund industry's focus on older boomers is warranted, according to Jeff Keil, president of Keil Fiduciary Strategies LLC, a Littleton, Colo.-based industry consulting firm.
First-wave baby boomers will soon begin to retire, and mutual fund firms need to come out with attractive products in order to retain their investment dollars, Mr. Keil said.
"I think they are a bit late to the party," he said, noting that fund companies should have focused on the problem earlier.
Second-wave baby boomers, however, will not be left out in the cold, Mr. Keil predicted. The mutual fund industry has the products to meet their needs, he said.
Several fund companies offer conservative equity products that try to deliver a reasonable rate of return without too much volatility, Mr. Keil said. For example, many companies have launched equity income funds within the last few years that focus on dividend-paying stocks, he said.
"I think there's plenty of product out there," said Clark Blackman II, president and chief executive of Alpha Wealth Strategies LLC of Kingwood, Texas. He doesn't need products designed specifically for baby boomers, he said, because he puts together portfolios that meet their needs himself.
For boomers requiring income, it's a matter of creating two "pots" for the client, Mr. Blackman said. The first, managed using modern portfolio theory, focuses on increasing assets through a diversified portfolio. The other, containing safe, income-generating securities such as laddered Treasuries, focuses on income.
The second can be replenished from the first as needed, Mr. Blackman said.
For second-wave boomers who don't yet require income and don't want a lot of volatility, sticking with a portfolio guided by modern portfolio theory should provide a solution, he said.
Advisers don't need new products, agrees J. Michael Martin of Columbia, Md.-based Financial Advantage Inc.
For second-wave baby boomers who want to raise assets but hold down volatility, there are various strategies advisers can use, he said. One is to use market volatility to help smooth out market returns.
That sounds a little like market timing, admitted Mr. Martin, who sells his "winners" and holds the cash until he sees something worth investing in. This has the effect of smoothing returns, he said.
Of course, not every investor can afford an adviser, Mr. Martin said.
If Mr. Harrington is right, that leaves some second-wave baby boomers with few options beyond life cycle and target date funds. But those aren't necessarily bad options, according to Charles "Chip" Roame, managing principal of Tiburon (Calif.) Strategic Advisors LLC.
Mutual fund companies have done a pretty good job of making sure that as target date funds become more conservative over time, they don't become too conservative and choke off accumulation, he said.
But even for older baby boomers, Mr. Roame suggested, the fund industry should still concentrate on asset accumulation and asset growth.
Most baby boomers are still years away from retirement and haven't hit their "peak earnings years yet," he said.
By talking about retirement income, "it seems like [fund companies] are jumping the gun," Mr. Roame said.
David Hoffman can be reached at dhoffman@crain.com.
