Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

SMAs Offer Retirement Auto-Pilot


NEW YORK-Without a good financial plan, retirement can be anything but relaxing. In fact, even for the affluent investor, adjusting to what should be one's leisure years takes some jarring realizations, said speakers at a recent presentation hosted by the Money Management Institute here.

These realizations present opportunities for money managers to show how separately managed accounts, especially unified managed accounts, can help assuage their concerns.

"There is no one product that solves the whole problem," said Len Reinhart, president of Lockwood Advisors in Malvern, Pa. "It's a combination of four or five or six," he said.

Managing that many products can be overwhelming, even for the self-directed investor who has navigated his own course through the accumulation years. "The [Baby] Boomer is faced with being his own pension manager," Reinhart said. "The advice component is going to be huge."

The shift to investors seeking advice is well under way. According to data from McKinsey Consulting, in 1996, 54% of investors purchased mutual funds through advice channels, and 10% bought direct. Today those figures are 89% and 4%, respectively. In part, that shift is due to a bad taste left in investors' mouths after the post-tech-bubble downturn and 2000-2002 bear market, said Kevin Hunt, an executive vice president with Old Mutual US Holdings in Boston. But it is also indicative of a large swath of investors preparing for retirement, unsure of how to proceed, he said.

A report from Chicago-based Spectrum Group showed that among 504 affluent investors, those with more than $500,000 in assets, excluding their home, said that they prefer to work with one adviser who can manage all of their financial concerns. The only thing ranked more important, among 72% of respondents, was that the adviser place the clients' interests ahead of those of his or her firm.

The number of affluent investors is growing, according to Spectrum Group. There are 15.3 million U.S. households that fit this description, up from nine million in 2002.

Managed accounts, UMAs in particular, help investors and their advisers address the need for advice and a variety of products efficiently, said Bill Creager, president of Envestnet, a Chicago-based platform provider. The draw of UMAs, he said, is not only the convenience of consolidated reporting, but the ability for managers to pick and choose products and strategies while managing for tax efficiency.

Part of the problem for accumulation-minded Boomers is that they don't really know what to expect.

The average age among affluent investors is 56, and 68% are still working, either full or part-time, according to the report. For one thing, the idea of retiring at 65 is arbitrary. When asked when they might expect to retire, 22% said they planned to retire within five years, while 26% said between five and 10 years. But in reality, retirement is not such a planned event, Hunt said. Citing data from McKinsey, Hunt noted that in 2005, the average age at retirement was 59. In 2006, it was 57.

In fact, one-third of workers retire before 65. Among affluent investors, the reasons for retiring are two-fold, according to George Walper, president of the Spectrum Group. One contingent is pushed out, often in favor of younger, cheaper labor during corporate restructuring, while the other "wakes up one day, and says, I'm done,'" he said.

Once retired, the concept of investment risk needs to be redefined. For one thing, in retirement, the concept of investment risk needs to be redefined, said Reinhart. "In the past, risk was volatility. Now it's running out of money," Reinhart said.

Still, fewer than 10% of older workers plan to reduce spending in retirement, said Hunt.

Thirty percent said they planned to cash in by selling their homes, Hunt said, but only about 5% actually do. Most importantly, fewer than 20% have a financial plan. Of those who do, only half actually follow it, he said.

That's because people are conditioned to plan for death, through wills and estates, but not life, said Reinhart. "The living plan needs to be mapped out," he said. Reinhart broke retirement into four stages: the Golden Years, a euphoric celebratory time of carefree spending immediately following retirement, which is followed by a "back to reality" phase, which is then followed by disengagement and, finally, institutionalization.

"Who will take over during disengagement?" he asked. "This has to be set up in advance."

Managed accounts can help provide that roadmap, but advisers must be sure to promote process over product, said Frank Campanale, president to Campanale Consulting in Birmingham, Mich. "The product is incidental," he said.

The wealthier the client, the more likely they are to turn to managed accounts, according to different Spectrum research. Among affluent investors, 62% own managed account, compared to 79% of ultra high-net- worth investors-or those with more than $1 million to invest. Furthermore, 29% of affluent professionals turn to managed solutions, compared to 11% of business owners. Walper attributes the difference to comfort. Affluent professionals may have seen similar money management methods used in large corporations, while entrepreneurs tend to have a hands-on approach to money. Women, likewise, are more likely than men to use managed accounts, he said. "Women are more dependent," said Walper.

Smart advisers will stay in touch with their clients. While 42% believe monthly contact with their adviser is sufficient, for those who are "touched" weekly, whether it be an e-mail, phone call or mail piece, satisfaction rockets to 99%, said Walper.

Hunt emphasized the increased opportunities for advisers in coming years as the $9.3 trillion retirement market is expected to surge to $19.3 trillion by 2012.

"If we don't rise to that challenge, all of us will suffer," he said.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

http://www.mmexecutive.com http://www.sourcemedia.com