On Wall Street is an online resource that provides “financial advisors at the largest and most prestigious brokerage firms with the best information and analysis in the industry.” Reporter Elizabeth Wine asked Dr. Joseph Coughlin, director of the MIT AgeLab, four questions about Baby Boomers and how investment firms can better serve this generation.
In addition to directing AgeLab, Dr. Coughlin speaks at conferences, consults with businesses worldwide, and writes a perceptive and informative blog entitled Disruptive Demographics, an apt way to describe the Boomer silver tsunami as a gathering force for business and societal transformation.
As I read his comments, I thought about these questions from my perspective. The financial services industry has much to gain and lose by how it addresses this generation, so several points of view should be helpful. Here are my answers:
You say that advisors must change the way they deal with clients, especially Baby Boomers. Why?
Let’s review some Boomer history. At critical junctures in their economic lives, they have lost faith in financial services providers. Just as Boomers were feeling pressure to become more self-directed in their investing due to diminishing availability of defined benefit (guaranteed) retirement programs, the market took a precipitous crash in October 1987. Just as many Boomers began feeling a sense of financial security due to swelling 401(k) accounts accumulated during the 1990s, the market plunged in 2002 when the Internet bubble burst. Just as they replaced these losses, the market took the harshest plunge since The Great Depression, in 2008. Many peers in my network felt betrayed by their advisors who did not predict these market corrections or manage their portfolios to assure greater diversification and asset protection. It is part of Boomer DNA to distrust authority in the first place, and the financial services industry has reinforced reasons to be suspicious of financial advice. This generation is desperate for prudent and realistic financial counseling, but few major brands have completely restored confidence, although many, such as Charles Schwab and Fidelity Investments, are working to assure this generation that they can depend on cautious financial planning advice in the future.
Boomers are facing a long and winding road on their journey to old-old age. Millions with inadequate retirement resources today need help now just to achieve a modicum of financial security once it becomes impossible for them to work any longer. Twenty years from now, many Boomers will need careful guidance about how to manage remaining assets so they do not outlive them. Some will be seeking ways to leave their financial legacy for children and grandchildren. The journey from today to 20 years from now is the same passage. To me it means “the rest of my life.” I don’t want to cast my fate just to Charlie who may leave the company in two years and then find myself relying on a stranger who only knows me as a set of numbers on a spreadsheet. This is why the financial services industry needs to understand its clients at an institutional level. What I call “humanistic knowledge capture” must become more refined as an art and science.
If retirement as the endless summer vacation is out, what's in?
Frankly, I have never met a Boomer who did not at some level wish to be free of obligatory work constraints. This belief that Boomers reject an “endless summer vacation” is somewhat mythic, even though surveys consistently report that 70 percent and more wish to continue working beyond retirement age. For many Boomers, summer vacation was actually a time to pursue other passions, whether travel or productive learning at summer camp. It wasn’t necessarily unproductive time. Who really wants to face the daily grind for the rest of their life … I mean, really? However, Boomers generally want to remain vital, productive and relevant. This is a generation in which individuals often define themselves by what they do. What they do is who they are. In their “third age,” many Boomers really want freedom: the liberty to make choices. They want avocations as much as vocations. They want to keep learning. Many want to give back through civic engagement. Freedom requires assets to cover the costs of being free from constraints. For the financial services industry, what’s in is “actualization.” How can realistic financial planning help Boomers actualize the best possible future?
Advisors once were authorities. They had secret knowledge and proprietary tools with which to advise and complete investment transactions. Boomers were mostly ignorant of financial planning — an illiterate cohort, as dependent as sick patients on primary care physicians. That, of course, has changed for many. Boomers have learned that those who claim prescient wisdom about financial matters are, in fact, human: flawed in their knowledge and capable of making mistakes in judgment. Boomers have been given keys to the kingdom of financial knowledge with multi-source advice online and sophisticated tools to assess financial decisions. This does not mean that most are now motivated to forego independent advice. Most aren’t. But many have adopted the aphorism made famous by President Ronald Reagan: “Trust but verify.” Self-direction has pervaded our lives and for good reasons. Boomers have questions they may not ask, but advisors need to answer.
“Do my interests come before your self-interest?”
“Will your company be there when I need you … 20 or 30 years from now as your advice impacts me the most?”
Thus, the relationship between an advisor and client can only be truly successful if it is interdependent … not dependent. The relationship must become more consultative and mutually beneficial.
What will these new retirement products look like?
Now that so many Boomers and younger generations face retirement without guaranteed pensions, it’s obvious that the financial services industry has an enormous opportunity to replace this huge gap in retirement security. Immediate annuities have stepped up to the plate, but five percent of the potential market has purchased these investments. Why? Well, for at least three reasons. First, how does it feel to hand an insurance company $300,000.00 to start receiving monthly checks of, say, $1,500.00? You’ve just traded in a fairly handsome nest egg, fully under your control, for the promise of a monthly income that can only defer part of the costs of living. The rest of the deal is a pledge, which leads to the second question. Will your company still be solvent and able to fulfill your commitment in 2040? And, finally, a third question: Will you change the rules of this fiduciary promise mid-stream … to your benefit, not mine? Innovative financial products of the future will address these questions from the client perspective. The financial services industry stands to gain enormous wealth with immediate annuities — or yet-to-be-named future products — and winners in the competitive slug out will be those who understand risk management, not just from a corporate perspective but also from the perspective of those who cast their fate to corporate solvency and longevity 20, 30 and 40 years from now.
ADDENDUM: SunAmerica Financial Services Group / Age Wave / Harris Interactive published a study revealing new attitudes toward retirement that have emerged following a decade of terrorism, war and recession. Some of the emerging Boomer views about retirement, and financial planning for same, have been addressed in my article above, written one month before data collection began by Harris Interactive.