The retiree market: a trillion dollar opportunity

By Rosemary McCracken | January 24 2012 09:19PM

As a large segment of Canada’s population moves into retirement, successful financial advisors will be those who tailor their practices to serving the needs of retirees, according to a recent Investor Economics report.

In the past two decades, the baby boomers, those born after the Second World War between 1946 and 1965, became investors and generated a tremendous amount of growth in the wealth management business. “In those years, Canadian boomers moved from being borrowers to investors,” Goshka Folda, Investor Economic’s Toronto-based senior managing director, noted in an interview discussing the highlights of The 2011 Fee-based Report. “Their assets under management – investments, assets in their chequing and savings accounts, and fixed-term deposits, but excluding real estate – went from $335 billion in 1997 to $1.1 trillion at the end of 2010.

“They were fortunate enough to benefit from the longest-running bull market of the 20th century that continued into the 21st century, with a disruption when the technology bubble burst,” she added.” And providers of wealth services also benefitted from this trend.”

But boomers are now moving out of their accumulation phase as they retire from the workforce. Investor Economics’ research shows there were 3.4 million Canadian households over the age of 65 at the end of 2010. “We expect that number to reach 4.7 million by 2020,” Ms. Folda said. “By then, one out of every three households will be made up of retired people who will control $4 of every $10 under management.”

Challenge for wealth managers
This poses a real challenge for wealth managers, she added. “In 2020, Canadians over the age of 65 will control 40% of all financial wealth under management. And one out of every three advisors’ clients will be part of this group.”

This is no surprise to Canada’s financial services industry. The 2011 Fee-based Report notes that investment product manufacturers have already introduced a range of products designed for people in retirement, including guaranteed withdrawal benefit funds, segregated funds, principal-protected notes, reverse mortgages and payout annuities.

“A long sequence of products has emerged and other products have been repositioned to serve retirees,” Ms. Folda said. These address a variety of needs such as principal protections, guaranteed income, risk management, tax efficiency and pre-assembled advice, among others.

“A long sequence of products has emerged and other products have been repositioned to serve retirees,” Ms. Folda said. These address a variety of needs such as principal protections, guaranteed income, risk management, tax efficiency and pre-assembled advice, among others.

Expanding expertise
This bodes well for advisors as retired clients will need financial advice on how to combine these products to serve their individual needs. “The product shelf is already there,” Ms. Folda said. “But retirees will need help in putting together baskets of the right products for them.”

But advisors may need to expand their areas of expertise in order to serve this market adequately. They’ll have to address issues beyond the investment strategy that have a direct bearing on retired clients’ financial standing, the report notes, such as housing, health issues, family dynamics, and the needs of spouses and children.

Retirement planning designations
Most advisors realize that the advice they’ll give clients in retirement will differ from the advice they gave in the accumulative phase, and the financial services industry has been quick to position its members as retirement planning experts. “We’ve uncovered a lot of designations,” said Guy Armstrong, a senior consultant with Investor Economics. “In the U.S. where there has been a high uptake on retirement planning designations, we found 14 bodies conferring these designations and a total of 24 retirement planning designations. Canada has seen a steady growth, with seven bodies conferring retirement planning designations and 11 designations, but our regulatory environment has prevented a real explosion.”

And giving advice to a retired client base will be complicated by the fact that, in Canada, financial advice has always focused on the delivery of investment or insurance products, Ms. Folda noted. “The way in which firms and advisors generate their revenues is so highly linked to the investment strategy component of financial planning. But the focus has to shift from products to holistic financial planning. The advisor will need to address issues beyond the investment strategy.”

The small number of fee-only planners practising in Canada has only a limited reach into the Canadian population. “The main channels now delivering advice are bank and credit union branch advisors, full-service brokers, financial advisors, including MFDA-licensed advisors, and insurance advisors. These are not necessarily all commission-based advisors,” Ms. Folda said, “but the major focus of their work is executing investment or insurance strategies. The clients of these channels can now say they are being given financial planning services, sometimes at no extra cost.” Fee-based planners need to give serious consideration to how they position themselves in the market.

Content of retirement plans
In the coming year, Investor Economics will focus on getting a measure of the number and the content of retirement plans that are being delivered in the industry, Mr. Armstrong said. “With the exception of the fee-based advisors, everyone else is delivering financial plans at no additional charge to clients, but the content of these plans are all over the map.”

Another challenge that fee-based advisors face, he noted, is that the channels that are currently delivering advice will do their best to hold onto their clients as they move into retirement. Some firms have already started to help clients move into retirement with programs that focus on understanding retirement lifestyle goals and financial needs. These include RBC Royal Bank’s Your Future By Design and Sun Life Financial’s My Retirement Café.

Fee-based business
But it is possible to run a fee-based business, Mr. Armstrong said. “The trust business has always offered services for fees, and its clients readily accept this arrangement.”

With a growing number of retired clients, advisors will also have to come to terms with the fact that retirement is a payout phase and, in many cases, clients’ capital will be depleted as they age. To counter this, Ms. Folda said advisors will need to develop strategies to engage younger generations. “A proper application of retirement planning is in itself a good way to engage younger family members. The fact that mom and dad’s needs are being taken care of speaks well for the advisor. And the fact that the parents’ estate planning wishes were carried out is another big plus.”

The greying of Canada’s population should also prompt advisors to take a team approach to their businesses, she added. This will allow the client to benefit from the skills and areas of expertise of different professionals.

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