Ready for Retirement?

Consumers in the United States are on the cusp of enormous change in what they want from their financial services providers, and bank executives don't seem to be paying much attention — which is odd considering the evidence is right in front of their faces. In fact, the evidence is their faces.

Like their fellow Baby Boomers, senior bank officials are getting older, and the customers that they would view as contemporaries are starting to make the transition from their prime earnings and savings years to a period, potentially several decades long, of drawing down their accumulated wealth.

Instead of focusing on saving and borrowing, on buying homes and paying tuition bills and seeking aggressive returns on their investments, Baby Boomers are starting to look for products that protect principal and dependably generate income, not to mention the advice they'll need to handle the transition.

But it looks as though banks by and large will arrive unprepared at the moment when Baby Boomers begin retiring in droves.

Michael Poulos, head of Oliver Wyman's financial services consulting practice in North America, says that in recent years, when banks ought to have been addressing the changing needs of their best customers, they were focused instead on survival issues stemming from the financial crisis. Now they risk being caught flat-footed by the next big demographic wave.

"There was a whole golden era of banking profits from 1993 through the beginning of the recent crisis. You had rates falling so credit could grow faster than the economy. There was a lot of demand for credit and all the asset classes were growing. There were investors hungry for yield and a lot of fees to be made in repackaging and selling, and on the deposit side you had the rise of debit cards which caused a huge inflow of fees, and also a steep yield curve," Poulos says.

"So now here we are, and the front end of the Baby Boomers are turning 65, and they are going to need something very different. They are asset rich and are about to become income poor-the exact opposite of what they have been."

About 75 million people were born in the Baby Boom that began at the close of World War II and lasted through the early 1960s, and they now control the majority of the wealth and spending power in the United States. Their retirement will be a demographic change without par in the country's history and-as with most everything else they've affected, from education to the workplace to the real estate markets-as the Boomers move through it, they will change it dramatically.

In a recent paper on the effect that Boomer retirement will have on equity markets, Zheng Liu and Mark M. Spiegel of the Federal Reserve Bank of San Francisco noted that, "To finance retirement, [retirees] are likely to sell off acquired assets, especially risky equities."

This unloading process will generate a vast pool of cash that will need to be parked somewhere, preferably in products offering longevity protection. In other words, retiring Boomers won't be looking for growth in the traditional investing sense, but they will want to avoid a situation where they have outlived their savings.

This poses a two-fold problem for banks. First, the products that would seem to fit the bill look more like insurance products than bank products. Second, even if banks were to try to chase the market with annuity-like products, it isn't at all clear that they have the expertise or authority to do so.

"You can hire people with the right skill set, and most banks are liquid enough to carry new assets on their balance sheets," Poulos says. "But if the new product looks like an annuity, is it going to be regulated like an insurance product? How is the new Consumer Financial Protection Bureau going to approach it? There are real questions out there-a whole slew of unknowns in terms of the capability of banks to actually deliver this stuff."

This isn't the first time the Boomers have forced banks to confront new realities. As Boomers first began to focus on retirement saving, they fueled the growth of the brokerage industry and forced financial institutions to make investing in stocks and bonds simpler and cheaper.

Maryann Johnson, senior vice president and market manager at the American Bankers Association, says the trade group is trying to help banks prepare for the demands that their Boomer customers will place on the industry as they plan for and begin their retirement. Last year, the ABA instituted training in how to offer individual retirement planning services to clients.

"The biggest service they need is planning to make sure the asset classes they hold aren't working against each other," Johnson says. "You really do need that expert planner or financial advisor to suggest that based on your risk level, tolerance and needs, here is a more appropriate portfolio diversification to meet those needs."

But what happens when reshaping a portfolio to keep pace with a client's objectives means steering wealth straight out of the bank?

Noah W. Wilcox, president and CEO of Grand Rapids State Bank in Grand Rapids, Minn., says that his bank has a brokerage arm that is quite capable of helping long-time clients transition their wealth into more retirement-friendly products. Significant liquid assets sitting in money market accounts or certificates of deposit, for example, can easily be moved into a wide range of annuity products. But once the bank collects its fee for arranging the purchase of an annuity, the client's money disappears from the bank's ledger.

"From a liquidity standpoint, it does leave the bank," Wilcox says. "Certainly, you want to keep as much of that in house as you can, but it doesn't make sense for the customer."

As an alternative, says Wilcox, his bank has spent several years investigating the possibility of launching a trust company. "I think you will see more banks in the community bank sector start to seek trust power and set up trust companies," he says. "I also wouldn't be surprised to see regional trust companies put together by a consortium of banks."

Of course, running a trust company requires having the trust of clients, and the bank sector is coming off a wrenching few years in which their reputation as prudent stewards of their clients' assets has been sorely tested.

"In a post-crisis world," Poulos asks, "is anyone going to go to one of the major banks and say, 'Here is a third of my wealth in exchange for your promise to keep paying me for 30 years'? That's going to be a hard sell."

But with so much profit at stake, somebody-perhaps in banking and perhaps not- is going to figure out how to best serve the needs of the massive wave of Boomer retirees, and when they do, it will make them a lot of money.

"It is very much a jump ball," Poulos says. "It is not clear to me that banks win."

Rob Garver is a freelance writer based in Springfield, Va.