Investors and financial advisers often speak different languages when it comes to retirement income. Most advisers are preoccupied with accumulation and products, while investors who are already retired or near retirement want to know whether they will have enough money to see them through their golden years. Both sides are frustrated that the other “doesn't get it.”
Looking ahead to retirement with much trepidation, investors are saving more, spending less, going to cash and working longer. Advisers are good at getting investors to protect their assets but find it difficult to show them an optimal path to increase and withdraw assets over a decades-long retirement.
Amid their confusion and doubts about whom to trust, investors typically spread their average of two to six accounts among two to four advisers. That leaves investors with an uncoordinated portfolio as they enter retirement and an uncanny knack for doing the wrong thing at the wrong time.
Several firms are working on a solution that is generically referred to as personal retirement income solution management. The central idea behind Prism is that investors and advisers would be much better served if assets were managed as a unified household.
Prism is like a retirement GPS.
Investors know their destination — they want to live worry-free after they stop working — but they aren't sure how to get there. They have accumulated a variety of products and accounts over the years but need help in coordinating the best mix of planning, investment strategy, and asset and product allocation to achieve their objectives.
Prism also shows how to “play the hand they hold” by optimally sequencing and synchronizing all income sources, such as taxable accounts, individual retirement accounts, annuities, Social Security and 401(k) accounts from accumulation to income and, ultimately, bequest. And as investors have come to learn, especially over the past 10 years, “stuff happens.”
CORRECT COURSE
Having experienced unrelenting change, investors want to be able to see whether they are on track and receive guidance on how to correct course.
Prism represents a significant step forward.
It makes the retirement income process more graphic, intuitive and easier, and helps the adviser show investors how to do the right thing, at the right time so that they don't run out of money.
Advisers who do this well will earn the investor's trust and benefit from asset consolidation.
As investors move toward retirement, they prefer to consolidate their assets as a matter of simplification. But they want someone they trust to provide clear value beyond accumulation and products.
Firms such as American Funds, Bank of America Merrill Lynch, Fidelity Investments, LPL Financial LLC, Northwestern Mutual Life Insurance Co., SunTrust Banks Inc., Wells Fargo & Co. and others have built or are building Prism models to differentiate themselves by being both comprehensive and easy for the adviser and investor to develop a road map to retirement.
Given the complexity of income generation, technology becomes critical to achieving these objectives. New elements are being tied to existing capabilities to help advisers and investors enjoy greater clarity and better results.
The process starts with a planning exercise to determine income needs in retirement. This is followed by assessing the investor's risk tolerance and how that might evolve so that advisers and investors can determine the appropriate product mix, asset allocation strategy and how much, if any, guaranteed income is needed through, say, annuities.
The most challenging aspect of the retirement income process comes next: the income generation itself. This is where advanced technology plays a critical role.
New tools are available that look at all assets down to the tax lot level, as well as all sources of income such as Social Security, annuities, pensions, etc. The idea is to create a road map showing how to minimize taxes by suggesting how much, when and from where to draw income.
It can improve investor income, remaining balance or bequests by as much as 30%.
Although Prism is in the early stages and evolving, advisers who are using them are getting a jump on the competition.
Jack Sharry is executive vice president of LifeYield LLC, a technology solutions provider, and chairman of the Managed Money Institute's retirement solutions committee.
