The industry hasn’t historically trained its advisors to decumulate assets, the focus ever being on building your practice. Much emphasis has been placed on finding and gathering assets, without a lot of stress placed on how to decumulate that wealth when its time.
Today, however, advisors say it is high time for this approach to change.
More, they say a concerted focus on this issue is not something that should be new or news, but rather something the industry likely should have started emphasizing 10 years ago.
“It should’ve started a long time ago,” agrees certified financial planner (CFP), Vince Olfert of financial advisory firm, Connect Wealth. “Some clients are going to outlive their money by a long shot. For them, it’s about decumulating as tax-efficiently as possible for them and passing as much as they can on to kids or to charity or to whatever is a priority. It’s those that are on the cusp who need to make some pretty smart decisions to maximize their money saved, because it’s going to be tight. Those are the ones I think could fall through the cracks. I think our industry is behind. We just aren’t paying enough attention to it.”
Cooperation instead of competition
He adds that a focus on cooperation, rather than competition, would likely help the situation. “There is so much business out there,” he adds. “If firms were to create environments that foster cooperation, versus competitiveness, I think that would help.”
In his own practice, CFP Jason Heath of fee-only financial advisory firm, Objective Financial Partners says a review of some financial plans will often reveal that advisors are using rules of thumb when analyzing a client’s holdings, which don’t always effectively reveal the client’s true position. “Obviously, there are situations where somebody may not save enough for retirement or is spending too aggressively. That is unfortunate,” he says. “But we also find situations where people over-save. They are already financially independent, but they think they need to work five more years. The knowledge about how much you need to retire or how much you can spend in retirement is very empowering.”
The boomers reach retirement
To get a sense of how big the challenge or opportunity is, CFP Alexandra Macqueen and CFP David Field, in their book, the 5th edition of The Boomers Retire, A guide for financial advisors and their clients, provide an examination of the statistics in their very first chapter. (The resource is quite extensive, also focusing on government pensions and insurance, the wide myriad of different pension plans being offered by employers, tax shelters and other sources of retirement income, investment strategies, tax planning, living arrangements, estate planning, practice advice for working with retired clients, and more.)
“Compared to other segments of the population, the over-65 cohort is expected to grow much faster,” they write. “Statistics Canada defines the baby boom in Canada as starting in 1946 and ending in 1965. Today, more than one in two Canadian seniors are baby boomers, with their share of the population increasing as the last boomers reach age 65 by 2031.”
More, they say within the over-65 age group, centenarians – those over age 100 – are now the fastest-growing age group in Canada. By 2065, it’s estimated that there could be nine times as many centenarians as there are today – around 90,000 in 2065 compared to just 10,000 in 2018.
“Compared to previous generations, the single biggest change impacting retirement planning is the greater number of years we are now living in retirement. Since the 1950s Canadian men have seen about a two-thirds increase in expected longevity after the age of 65, while Canadian women are living twice as long,” they add. “As our collective life expectancy has risen, we have allocated those additional years of life to the retirement segment of the life cycle.”
Not every advisor can serve this cohort either, as not every advisor will have the tax knowledge or the necessary knowledge about government pensions.
“There’s a big variety out there in terms of the decumulation planning that people are getting,” Heath agrees.
More expertise needed
The main challenge is this: More planning is needed for this cohort, and clients have a deeper interest in the financial planning exercise than they may have been in the past when they had time until retirement and likely an occupation to focus on. Consequently, more touchpoints are needed, and more ongoing education and expertise is needed, all at a time when advisors are losing assets.
In addition, Macqueen and Field also point out that financial planning is dramatically more complex, with a wide diversity of approaches that need to be taken into consideration, including early retirement, phased retirement and working retirement plans, to start.
Their list of the elements that advisors need to understand to help clients make optimal choices also includes time, planning and funding. In addition, advisors need to project well the various sources of income that are or will be available over the client’s expected lifetime, balance lifestyle and legacy goals and do it all in a way that ensures overall tax efficiency.
Challenges have grown
“As the range of retirement savings and income options has increased, the challenges of financially planning for retirement have grown,” they write, pointing out also that defined benefit coverage in the private sector has also fallen dramatically, making things even less straightforward.
Olfert, meanwhile, also points out that a lack of planning leading up to retirement quickly becomes apparent too when reviewing a prospective client’s situation and accounts for decumulation planning.
“Decumulation should actually be top of mind for an advisor, in my opinion, right when they start working with the client, 10, 20, 30 years out. There are potential problems if we don’t deal with it,” he says, adding that thinking about such things decades in advance creates important flexibility that is needed when executing the best available strategies for a client’s retirement.
Avoiding any discussion about decumulation and what a client’s life might be like in retirement, meanwhile, is quite possibly a good way to lose clients who are approaching those years as well, as the number of clients who require the service is growing notably, as are the number of advisors who are providing such services.
“I think advisors who are not planning for aging clientele may find themselves out of business.” - Laura Tamblyn Watts
“I think there is an opportunity, but I think advisors who are not planning for aging clientele may find themselves out of business,” says CanAge CEO, Laura Tamblyn Watts. “I think the sector is engaged in realizing these are pressing concerns,” she says adding that in her various roles she’s observed that there would appear to be rising demand for continuing education, skills and training in the area.
“Advisors are learning about the needs of the age wave,” she says. “Clients are starting to think about decumulation. Advisors really need to better understand the needs of each individual client.”
