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SMA Exec Gives Industry the Straight Dope

Steve Gresham doesn't mince words.

True to form, the executive vice president and chief sales officer of the private client group at Phoenix Investment Partners offered a sobering view of the nation's retirement landscape and laid out the challenges it presents for the $576 billion separately managed account industry at the Money Management Institute's annual convention in Philadelphia earlier this month.

"The value proposition at the adviser level is in trouble," Gresham told attendees in a conference session he characterized as a "decompression chamber" for managers and sponsors, a transition from their everyday toils.

To illustrate his point, Gresham showed the audience the results of the annual Phoenix wealth management survey, which polled 2,800 millionaire households. "They've got an opinion, and they're saying it louder every day," he said of the SMA investing public.

One of the questions posed in the survey is, "Why would you be leaving your primary adviser if, in fact, you have a problem with that person?" In other words, what is the fastest way to determine the satisfaction rate of people working with a primary adviser?

The survey's respondents cited four critical reasons for leaving their current primary adviser: performance; a lack of pro-activity on the part of the adviser; they don't believe in the adviser's strategies and fees. The fees and the strategies employed represent the "perception of value", Gresham noted, and the challenge for the SMA industry is to shore up that value proposition.

Drilling down a bit, Gresham observed that among the relatively newer players, like Schwab Direct and Fidelity, you see a large number of people who say they are looking for a primary financial adviser. With the onslaught of Boomers moving toward retirement, there is certainly tremendous opportunity as evidenced by the fact that Boomers outnumber their predecessor generation by a 3:1 ratio.

But given the stark differences in the mentality of the two generations, existing providers of financial advice are faced with the challenge of meeting their unique needs. Having lived through the World War II era, in which the nation's sovereignty was threatened, the older generation "developed a respect for large organizations and the comfort and security of the masses, which obviously the Boomers do not share," Gresham said.

One of the ways Boomers are investing their retirement dollars is through target-date offerings such as asset-allocation, lifestyle and lifecycle funds, which have experienced dramatic growth in recent years. "These ideas affect, to me, the opportunity to opt out of the adviser model," Gresham said. When provided with the opportunity to have a "set it and forget it" investment strategy endorsed by a reputable firm, investors are choosing to park their money in those types of funds.

The trend toward asset allocation and target-date funds reflects investors' recognition, at least on some level, of their vulnerability, which poses both challenges and opportunity for providers, he continued. The Phoenix survey of millionaire households shows that only 34% of investors whose goal is a "comfortable retirement" are funded, half of whom have already retired.

Further, these households have a tendency to overstate their net worth, Gresham said. For example, when evaluating the value of their 401(k), they may not take taxes into consideration. Also, if they have a small business, it probably is not worth as much as they think. While the average reported net worth of the millionaire households was $2.6 million, Gresham argues that, realistically, it is probably closer to $1 million to $1.5 million.

Not only do people overstate assets, Gresham said, but they dramatically underestimate their liabilities, the most significant being their longevity. "Most people think they're going to die an awful lot sooner than they actually do," Gresham said. Perhaps an even more compelling statistic is that 77% expect to retire with at least 80% of their current net income, despite the fact that two-thirds of the respondents don't even have a written financial or estate plan.

The bottom line is, they're not ready.

In order to better service this large demographic of folks ill-prepared for their twilight years, Gresham urged his constituents to set specific numeric goals for their clients and help them stay the course. That involves managing both risk and liability. Liability represents known or voluntary obligations, whereas risk represents things you can't quantify or involuntary obligations. Each is part of a process that must be conveyed to the consumer, who often does not have an adequate respect for the process, he noted.

Ultimately, the challenge for the SMA industry, as outlined by Gresham, is to move from "process" to "packaged process" in order to improve chances of investor success. The packaged process must include an intelligent approach to problem solving, particularly in instances where the cost is not known, he said. That entails developing a discipline that has a consumer focus, a mantra that he recommends as a recipe for a successful business.