The financial services industry has long focused on building its clients’ wealth for retirement, but this is just one side of the equation, says Matt Schott, a senior analyst at TowerGroup in Needham, Mass.
There is a huge opportunity for banks and other institutions that can help clients both build and then draw down their wealth intelligently during retirement, he said. And although these facts are well-known, financial companies have been slow, he said, to adjust to them — with some exceptions.
A Fidelity Investments’ Retirement Income Advantage platform, rolled out in June 2004, “shook the industry out of its lethargy,” Mr. Schott said in an interview last week at the Securities Industry Association’s Technology Management Conference in New York. The platform is a set of products and services to help clients plan, invest, and manage their income for living in retirement.
Though many banks have the same array of products and services, Mr. Schott said, none has yet assembled them in a seamless package like Fidelity’s. “The one that does put it together will have a lot of advantages,” he said, and he named Wachovia Corp. as a bank moving in the right direction.
Fidelity evaluates clients’ risks — everything from living longer than expected to general inflation and rising health-care costs — and develops an investment plan and draw-down strategy accordingly. It includes features like direct deposit of Social Security checks, systematic withdrawals, and monitoring capabilities to help clients stay on track.
Financial institutions should supply solutions configured for different tiers of customers, Mr. Schott said — mass market, affluent, and high-net-worth. But banks and others face obstacles to making that happen, he added.
In a typical bank, branch employees work with the mass affluent; retail brokers with the mid-level customers; and trust and private bankers with high-end clients. Customers move up the wealth ladder during their working years and down it as they draw down assets during retirement, but banks have not figured out how to move customers among the appropriate departments as their financial situations evolve.
“They haven’t yet figured out how to move them up and down — but also how to have seamless integration across what used to be separate businesses,” Mr. Schott said.
Brokerage units are loath to relinquish profitable clients, for instance, and trust units have long prized their independence. Among the banks changing constructively is Wachovia, he said.
“Wachovia is doing a very nice job with the multiple layers,” he said. “They have done a lot of work on trying to make the trust-versus-brokerage work.”
Affluent investors, those with $200,000 to $2.5 million of assets, are worthwhile targets for financial institutions, Mr. Schott said. The segment is underserved relative to the high-net-worth category and needs help understanding draw-down risks, he said.
In addition, a large portion of their assets typically emerges from 401(k) rollovers. “There is a real chance to grab more assets if you do this effectively,” he said.
Banks and other financial companies have been tracking the baby boomers’ surge toward retirement: There were 35 million Americans older than 65 in 2000 but will be 77 million by 2040, he noted.
But only in the last year or two has the industry focused on the challenge of managing nest eggs through retirement, he said. In view of the shift from traditional pension plans, it is up to individuals to manage their retirement income, taking into account everything from life expectancy to the interest rate environment.
American men who reach 65 have a better than even chance to live into their early to middle 80’s, he said, and women of 65 have a better than even chance of living into their late 80’s. Among married couples 65 or older, there is a better than even chance that one will live into his or her 90’s, Mr. Schott said.
The challenges and opportunities have worked their way onto conference agendas and helped spur formation this year of a trade group, the Retirement Income Industry Association, he noted.
