Who Will Dominate The Retirement Advice Business?
December 7, 2015
by Joe Tomlinson
Carlson Capital's Black Diamond Arbitrage Partners fund added 1.3% net fees in the first quarter of 2021, according to a copy of the firm's March 2021 investor update, which ValueWalk has been able to review. Q1 2021 hedge fund letters, conferences and more At the end of the quarter, merger arbitrage investments represented 89% of Read More
In the way Amazon dominates the book-selling business, a financial-service provider will emerge as the leading provider of retirement-income strategies. Here is how to assemble a full business model and my predictions about which companies have the best chance to take over.
The retirement advice business is fragmented, inefficient and serves only a small segment of the population. It’s a business model ripe for takeover by a few major players or maybe even a single category killer like Amazon. Most of the pieces required to build a dominant business model already exist, they just haven’t been appropriately combined.
Mass affluent individuals and couples are shouldering more of the responsibility for retirement planning, but poorly equipped to deal with the complexity. The financial advice business has concentrated on the upscale market, where generating retirement income is simpler than for middle-income households. Upscale clients can live off portfolio income or take systematic withdrawals, whereas those with less savings need to consider annuities and the use of home equity to provide sufficient income.
There are no agreed-upon standards for generating retirement income. Wade Pfau, in this blog post, listed 34 different retirement-income strategies, and it’s likely the full number is considerably higher. Service providers range from conscientious and capable planners to brokers whose recommendations are influenced by product commissions. Unlike upscale market advisors, those serving the middle market are more likely to be single-product salespeople than true advisors.
Add it all up and there’s a huge market with unmet requirements and lots of questions about how to meet those needs.
Retirement advice tends to focus on specific recommendations about product mix, for example, “Invest $200,000 of savings in a 60/40 stock/bond mix and take systematic withdrawals, and use an additional $150,000 to purchase a variable annuity that will provide 5% guaranteed lifetime withdrawals.”
A better approach would focus on goals first and then rely on a computer model to come up with the best product mix. Without getting into product details, the advisor and client would make decisions about goals, such as the level of income to be generated, the maximum risk of depleting funds and desired liquidity. The goals for each particular client would be reached by dialing a mix of investments and annuity products – quite different from the way it’s done currently.
The good news is that there are systems that already do this, but they haven’t gained much traction. This recent article in the Retirement Income Journal, available to subscribers or for purchase, summarized the various offerings. A system that has been around for years is QWeMA, originally developed by retirement research guru Moshe Milevsky and now offered by Cannex. A newer development is the ReLIAS system offered by economist Mark Warshawsky.
The target market for these systems has been large financial institutions to provide a marketing tool for their salespeople, but the systems have not achieved widespread use because they don’t fit with the product-push culture of those sales organizations. A different target market is independent advisors, but, given their upscale focus, there’s not much demand for systems that recommend mixes of annuities and regular investments.