Advisor Best Practices in Delivering Retirement Income

Transcription

1 Retirement Income Industry Association Strategic Study Series Advisor Best Practices in Delivering Retirement Income RIIA Members Version January, 2011 Study Authors: Dennis Gallant President GDC Research Howard Schneider President

2 Table of Contents OVERVIEW AND KEY FINDINGS...3 THE RETIREMENT INCOME PROCESS...4 INTRODUCTION...4 RETIREMENT INCOME SUPPORT A DISTINCT DISCIPLINE...4 BROADENING SCOPE OF RETIREMENT INCOME SUPPORT...5 PLANNING AS THE BASIS FOR RETIREMENT INCOME SUPPORT...6 FOCUS ON PROCESS NOT PRODUCTS...7 ADVISORS AND RETIREMENT INCOME DELIVERY...9 RETIREMENT INCOME QUOTIENT...9 RETIREMENT INCOME PHILOSOPHY...9 GROWTH IN RETIREMENT INCOME CLIENTS SERVED...11 THE CHANGING NATURE OF RETIREMENT INCOME SUPPORT...12 PRACTICE CHANGES TO SERVE RETIREMENT INCOME CLIENTS...12 ACTIONS IN SUPPORT OF RETIREMENT INCOME CLIENTS...13 INVESTMENTS TYPICAL ALLOCATION AMONG VEHICLES...13 PRODUCT PROVIDERS USED...15 ATTITUDES TOWARDS RETIREMENT INCOME PRODUCT SOLUTIONS...15 SPECIFIC ACTIONS TAKEN IN RESPONSE TO MARKET DOWNTURN...17 A SNAPSHOT OF BEST PRACTICE ADVISORS...18 CONCLUDING THOUGHTS...19 APPENDIX GDC Research and, This research publication is protected by the copyright laws of the United States

3 Overview and Key Findings In conjunction with the Retirement Income Industry Association (RIIA), we are pleased to provide this summary of key findings from our ongoing evaluation of how leading advisors serve retirement income clients. Since mid-2008, GDC Research and two leading consulting and research firms focused on key competitive trends impacting financial intermediaries and providers - have conducted ongoing research and analysis of advisor best practices in retirement income delivery. The goal of these studies is to provide a unique viewpoint that examines retirement income from the perspective of the advisor. The reports are written to provide relevant information to a range of organizations including mutual fund providers, insurance companies, broker dealers, distribution firms, and other providers. The studies include feedback gathered from quantitative surveys with nearly 1,000 advisors and qualitative input gathered from in-depth interviews with advisors, executives from asset management firms, insurance companies, broker-dealers, third party providers and industry experts. More details about the reports can be found in the Appendix (Page 21) in this document. Key findings include: Retirement income is a distinct discipline compared to accumulation planning, and is not just accumulation planning in reverse. To do retirement income effectively, advisors must use different methodologies, adopt new skills, acquire new knowledge, and create specialized processes to serve the broadening needs of aging clients. Advisors have been expanding the range of services they deliver, with managing investments just one of the areas of focus for retirement income clients. New areas such as health care, elder care, career consulting, and other personalized support are being delivered especially to more affluent clients. This reflects the higher expectations of boomers, their more complex and diverse family circumstances, and the growing sophistication of the clients. Planning is typically the basis for retirement income support, whether done formally or informally. Advisors use a wide variety of tools and techniques to plan for retirement income, reflecting the lack of current infra-structure in this area. The emphasis on planning underscores the emphasis on process rather than product in meeting client needs. Advisors are in various stages of transition as far as incorporating retirement income into their practices, with only a limited number of practices fully engaged with serving this growing audience. Fewer than 5% of advisors are heavily focused already on retirement income, with many just beginning to shift the focus of their practices. Many of these advisors need help in making this transition. 3 GDC Research and, This research publication is protected by the copyright laws of the United States

4 There is no single philosophy or approach that is employed by advisors in managing retirement income portfolios, with the marketplace highly fragmented. And likely to remain so in the foreseeable future. The diversity of philosophies suggests a lack of concurrence among practitioners in the optimal way to deliver income or cash flow for current needs while generating growth to deal with rising longevity. The demand for retirement income support is increasing, with 6 in 10 advisors indicating their base of retirement income clients is expanding. Advisors focused on retirement income also benefit from the aggregation of assets and consolidation of accounts which is requisite in order to deliver effective support. Retirement income portfolios integrate a variety of investment vehicles, rather than rely on a silver bullet or single product solution to solve the challenge. No solution is dominant across portfolios or income philosophies and there is no single product solution. Rather portfolios bring together mutual funds, ETFs, individual securities and guaranteed solutions in an integrated way. As a result of the market volatility, advisors have taken a more conservative stance to portfolio construction, with key actions including rebalancing portfolios to allocation targets and increasing use of variable annuities. The uncertainty in the past 30 months has caused many advisors to be more highly attuned to managing portfolio risk, although there is little agreement on the best solutions for controlling risk. The Retirement Income Process Introduction Despite the volatile markets and uncertain environment, the demand for retirement income and transition support is growing. The opportunity and benefits for advisors are clear. Advisors focused on retirement income are experiencing increased referrals and relationships and the Coming Consolidation is a reality as clients consolidate assets with these best practice professionals. To capture this emerging opportunity, advisors need to expand their offering and differentiate themselves through a well defined retirement income process. Retirement income delivery requires advisors to evolve their business model and be even more deliberate in their business planning. Nonetheless, the rewards of this shift ultimately outweigh the challenges. Retirement Income Support A Distinct Discipline Leading advisors recognize that serving retirement income clients is a distinct discipline that differs from providing support to accumulation clients. Serving retirement income clients is more difficult and time consuming, requires greater breadth of skills and knowledge, and is more comprehensive 4 GDC Research and, This research publication is protected by the copyright laws of the United States

5 than support for pre-retirees. Specific elements that make retirement income support distinctive include: Exhibit 1: Characteristics: Retirement Income Planning vs. Accumulation Planning Accumulation Planning Modular in nature Does not require aggregation of client assets Less integrated across subjects Longer term horizon for planning Time frame generally defined Investment based Emphasis on product as solution Impact of market risk is manageable and little need to address retirement risks Moderate degree of client customization Less emotionally charged for client Narrow in scope Scaleable delivery Focus on achieving return goals Periodic monitoring and adjustment Moderate risk exposure for the advisor Well established infrastructure and support tools Retirement Income Planning Comprehensive in nature Requires aggregation of client assets Highly integrated across subjects Multiple time horizons for planning Time frame generally uncertain Risk and cash flow or outcome-based Emphasis on process as solution Impact of market risk less manageable and need to address retirement risk is great High degree of client customization More emotionally charged for client Broad in scope Less scaleable delivery Focus on achieving lifestyle goals Regular monitoring and adjustment More significant risk exposure for the advisor Elementary infrastructure and support tools Source: Advisor Best Practices: Retirement Income & Transition Support by GDC Research & Broadening Scope of Retirement Income Support The type of retirement income services that best practice advisors deliver is broad, involving a range of financial and personal issues that clients encounter as they shift to living in retirement. The range of services is expanding, going beyond asset management, risk protection, retirement income creation, and wealth transfer to also include challenges such as health care, elder care, career development and family issues. Advisors often provide non-traditional services as an accommodation for clients. However, best practice advisors are proactive and deliberate in offering these expanded services to clients. Few advisors offer all of the expanded services highlighted below. Nonetheless, advisors need to address the breath of capabilities they provide given the time and expertise required. They must also determine how best to provide these services, whether through themselves, their internal staff, or via a third party network. 5 GDC Research and, This research publication is protected by the copyright laws of the United States

6 Exhibit 2: Expanding Core Beyond Traditional Services Source: Advisor Best Practices: Retirement Income & Transition Support by GDC Research & Traditional Core Services Emerging Core Services Career Counseling Mortgages Relocation Nursing Home Selection Tax Mgmt. Insurance Investment Planning CORE Estate Planning Retirement Planning Risk Mgmt. Travel Services Health Care Family Counseling Career Counseling Mortgages Relocation Nursing Home Selection Tax Mgmt. Insurance Investment Planning CORE Risk Mgmt. Estate Planning Retirement Planning Travel Services Health Care Family Counseling Funeral Arrangements Funeral Arrangements Planning as the Basis for Retirement Income Support Virtually all leading practitioners incorporate some form of financial planning as the centerpiece of retirement income assistance. There is great variation among advisors in their approaches to planning, the formality and depth of plans, and the tools they rely on. Yet planning is clearly the starting point for working with retirement income clients, forming the basis for implementing retirement support and tracking progress against recommended action steps. 6 GDC Research and, This research publication is protected by the copyright laws of the United States

7 Exhibit 3: Advisors Providing Formal Financial Plans Yes, 70% No, 30% Source: Advisor Best Practices: Retirement Income & Transition Support by GDC Research & Best practice advisors make comprehensive planning a core element of their practices and are reluctant to work with clients who are unwilling to consolidate assets. Planning requires a deep discovery process to understand client needs, wants, and expectations. Focus on Process Not Products Leading advisors recognize that advice is the paramount deliverable to retirement income clients and that their most important role is to be a trusted guide to their clients. Nearly 9 in 10 advisors believe the value they add is driven by the process they use rather than the specific products or solutions they implement. Most advisors employ a highly customized approach to retirement income support. Having a thoughtful, consistent process to build portfolios helps advisors manage the high degree of customization and tailoring that accompanies serving retirement income clients. Having a formal process in place is critical ranging from client development and discovery to creating the financial plan and portfolio construction. Conveying a well articulated retirement income process to the client creates a differentiated value proposition that leads to asset consolidation and a trusting relationship. 7 GDC Research and, This research publication is protected by the copyright laws of the United States

8 Exhibit 4: Most Important Role of Advisors in Serving Retirement Income Clients Trusted guide 1 Retirement income strategies 2 Helping clients define goals 3 Risk such as longevity 4 Investment management 5 Source: Advisor Best Practices: Retirement Income & Transition Support by GDC Research & The delivery of retirement income will likely continue to be highly customized and tailored from firm to firm, advisor to advisor, and client to client. No observer should expect a one-size fits all approach to this marketplace. However, the advisor s process won t enable them to create custom solutions for all clients. The emphasis on product solutions will become more prominent for advisors serving small new worth clients whose limited affluence will restrict the advisor s options to create solutions as well as be compensated for time spent on customization. Exhibit 5: Advisor Customization Solution Spectrum High Level of Advice & Customization Product-Solutions Advice/Customized -Solutions Low Low Client Affluence High Source: Examining Best Practices in Constructing Retirement Income Portfolios by GDC Research and 8 GDC Research and, This research publication is protected by the copyright laws of the United States

9 Advisors and Retirement Income Delivery Retirement Income Quotient Most advisors have a considerable portion of their client base either shifting to retirement or already retired. More than half of the advisors have at least 40% of their book involving retirement income clients and an elite group representing 1 in 25 advisors has 80% or more of their practice involving retirees. Advisors can be segmented based on the degree to which they serve retirement income clients. This factor is defined as the Retirement Income Quotient. Consistent with this measure, four core groups of advisors emerge, as follows: Fledgling retirement income advisors, with 20% or less of current clients within 3 years of retirement or already retired 15% of the universe Emergent retirement income advisors, with between 21% of 40% of current clients within 3 years of retirement or already retired 32% of the universe Transitional retirement income advisors, with between 41% and 60% of current clients within 3 years of retirement or already retired 35% of the universe Committed retirement income advisors, with more than 60% of current clients within 3 years of retirement or already retired 18% of the universe including an Elite group having 80% or more of clients within 3 years of retirement or already retired Retirement Income Philosophy Advisors do not follow a single, common approach to managing retirement income portfolios. Instead, multiple philosophical approaches or methodologies are being used for retirement income clients. Three core approaches to exist. Within each philosophy there is considerable variation in how advisors build retirement income portfolios. The three core approaches are as follows: Risk-adjusted total return approach, with a focus on optimizing total return of the client portfolio; Pooled or bucket approach, with an emphasis on managing assets across duration-based short, intermediate and long-term pools; and Hybrid or income floor approach, with the objective of providing assured income for current client needs while managing for ongoing growth to serve client wants. 9 GDC Research and, This research publication is protected by the copyright laws of the United States

10 Exhibit 6: Description of Differing Retirement Income Philosophies Total Return Philosophy Investment Pool Philosophy Income Floor Philosophy Emphasis on diversification, performance and risk management across the entire portfolio similar to how pre-retirement assets are managed Assets draw down as a percentage of the portfolio that reflects client needs and circumstances, generally between 3% and 6% Portfolio not generally managed with income as a specific investment outcome May create short-term reserve account to manage cash flow needs Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities used more selectively Emphasis on establishing different pools of assets each with a different objective, time horizon or duration, and risk/return profile Generally invest in different pools or buckets with progressive five year durations and increasingly aggressive risk/return parameters Specific short-term pools established to generate income irrespective of current market environment Longer-term pools those with a horizon of ten years or more generally invested more aggressively to sustain portfolio purchasing power over time Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles often used as core portfolio components Emphasis on satisfying the minimum income needs of the client through a guaranteed or low-risk strategy, while managing the remainder of the portfolio to satisfy client wants or discretionary requirements depending on portfolio returns Generally carve out a specific portion of the portfolio to deliver consistent income to satisfy client cash flow needs no matter how the capital markets perform Remainder of portfolio is invested in a broadly diversified portfolio designed for total return within the risk parameters of the client, with excess returns beyond agreed upon targets harvested to meet discretionary spending desires Typically invest in a mix of mutual funds, ETFs, individual securities, cash equivalents and separate accounts, with annuities and other guaranteed income vehicles used as core components for the income floor portion of the portfolio Source: The Continued Evolution of Retirement Income Delivery by GDC Research and While none of the philosophies is dominant, the majority of advisors manage retirement income portfolios differently than how they manage accumulation portfolios. Virtually all advisors manage pre-retirement assets using a total return approach. However, less than half of all advisors use this same method for managing retirement income assets. 10 GDC Research and, This research publication is protected by the copyright laws of the United States

11 Exhibit 7: Retirement Income Philosophy Income Floor, 28% Risk-Adjusted Total Return, 42% Pooled/Bucket, 30% Source: The Continued Evolution of Retirement Income Delivery by GDC Research and Growth in Retirement Income Clients Served The majority of advisors over 6 in 10 have increased the net number of retirement income clients they support during the past year. This reflects rising demand for retirement support, the importance of obtaining professional help to navigate the complexities of retirement, and the competitive advantage that is associated with advisors who target services to retirement income clients. Less than 1 in 10 advisors indicate a net loss in retirement client relationships suggesting that these relationships tend to be loyal once established. Exhibit 8: Net Change in Retirement Clients Served Decrease, 7% Increase, 63% No Change, 30% Source: The Continued Evolution of Retirement Income Delivery by GDC Research and 11 GDC Research and, This research publication is protected by the copyright laws of the United States

12 Much of the increase in retirement income business is being driven by baby boomers. Nearly 7 in 10 advisors are experiencing growth from aging boomers, while less than 1 in 10 advisors are not yet experiencing growth from this group. The Changing Nature of Retirement Income Support Practice Changes to Serve Retirement Income Clients Many advisors have made changes to their practice in the past year to better serve retirement income clients. The most typical changes are the addition of new products and services and the expansion of financial planning and advice giving capabilities. These enhancements reflect advisors adjusting to the more challenging environment arising from the market downturn, including the need to modify investment approaches and strengthen relationships with clients. Advisors also have taken certain actions to expand retirement income related capabilities. Specific among these steps are obtaining special training or advanced education related to retirement income and expanding their network of relationships with other financial professionals. A more modest number of advisors have added professional staff to serve the growing number of retirement clients or have outsourced services to a third party. Compensation is an area that most advisors have not taken action. Most retirement income advisors are either fee-based or combine fees and commissions. Generally, advisors are reluctant to raise fees or compensation despite adding more services. As advisors continue to expand services to support retirees, they will need to be aware of the impact upon margins and be open to alternative methods of compensation. Exhibit 9: Changes to Serve Retirement Income Clients New Products/Services Expanded Planning/Advice 52% 54% Training/Education Expanded Network 33% 32% Added Professional Staff Outsourced 16% 18% Changed Compensation 12% Changed BD/Platf orm 4% 0% 10% 20% 30% 40% 50% 60% Source: The Continued Evolution of Retirement Income Delivery by GDC Research and 12 GDC Research and, This research publication is protected by the copyright laws of the United States

13 Actions in Support of Retirement Income Clients Advisors support retirement income clients through a broad range of actions. The most common steps taken are an annual in-person client review (4 of 5 advisors) Conducting an in-person review enables the advisor to address client concerns, reassess the client s perception of risk, and convey what new strategies the advisor may employ. It also provides an opportunity for the advisor to establish or reinforce their retirement income process with the client. Creating a customized investment portfolio (3 of 4 advisors), and developing a retirement plan (2 of 3 advisors) were also common. Exhibit 10: Actions Taken for Typical Retirement Income Client In-Person Reviews 81% Customized Portfolio 74% Written Plan 66% Advisory 59% Estate/Tax Planning Funds/ETFs 52% 51% VA Living Benefits 49% Extended Services 35% SPIA 21% Packaged Solutions 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: The Continued Evolution of Retirement Income Delivery by GDC Research and Investments Typical Allocation Among Vehicles Advisors acknowledge that managing retirement income portfolios is highly customized and dependent on the specific client circumstances. As a result, advisors do not usually rely on a single type of vehicle or solution but instead integrate a variety of products to deliver both income to meet current needs and the long-term growth to sustain purchasing power of a portfolio over time. In the typical portfolio allocation for retirement income clients, advisors integrate a range of solutions. 13 GDC Research and, This research publication is protected by the copyright laws of the United States

14 Actively managed mutual funds are the main component of most retirement income portfolios. Over half of advisors use mutual funds for at least 30% of the portfolio allocation. Other solutions that are typically used by advisors, although to a lesser degree than mutual funds, include ETFs/index funds, individual securities, and variable annuities. The concentration of these vehicles is typically between 10% and 30% of a portfolio, reflecting that most advisors use them as components of an integrated, diversified portfolio. There is significant variation in the way advisors use certain vehicles for retirement income clients. These differences offer meaningful targeting and communications opportunities for product manufacturers such as mutual fund companies or insurance firms that are focused on this market. Based on the degree to which they use certain solutions for retirement income clients, we have developed a segmentation scheme for advisors as follows: Non-allocators, or those advisors who do not generally allocate any assets to a specific vehicle for retirement income clients Low allocators, or those advisors who generally allocate 10% or less of retirement income portfolios to a specific vehicle Basic allocators, or those advisors who generally allocate 11% to 30% of retirement income portfolios to a specific vehicle Medium allocators, or those advisors who generally allocate 31% to 50% of retirement income portfolios to a specific vehicle Heavy allocators, or those advisors who generally allocate more than 50% of retirement income portfolios to a specific vehicle As noted in the table below, mutual funds are the only solution used by a significant proportion of advisors 1 in 5 for at least half of a typical retirement client s portfolio. Use of guaranteed solutions such as variable annuities tends to be roughly one-third or less of the typical asset allocation. 14 GDC Research and, This research publication is protected by the copyright laws of the United States

15 Exhibit 11: Level of Allocation of Investment Products Used for Retirement Income Clients Non Low Basic Medium Heavy Variable Annuities 26% 16% 38% 17% 3% SPIAs 34% 42% 20% 4% 0% Other Payout Annuities 52% 29% 17% 2% 0% Actively Managed Funds 10% 8% 30% 33% 20% Index Funds/ETFs 26% 23% 31% 11% 9% Individual Securities 31% 32% 21% 14% 3% Cash or Money Market 9% 56% 21% 8% 6% Investment Real Estate 35% 40% 19% 5% 2% Alternatives 31% 39% 21% 6% 3% Source: The Continued Evolution of Retirement Income Delivery by GDC Research and Product Providers Used Many advisors become comfortable with certain providers and tend to be committed to these firms as long as product performance and capabilities are sustained. While advisors are open to new providers and solutions, they are often challenged to find the time to thoroughly evaluate new options. Consequently, only 1 in 8 advisors indicate they are using different solutions for retirement income portfolios today compared to one year ago. Advisors use a broad variety of investment providers, with no firm owning the market for retirement income solutions. The list of top providers they currently work with for building retirement income portfolios includes more than 100 different mutual fund companies, insurance firms, separate account providers and other organizations. Of this group, only 17 providers are used by at least 5% of the advisors. The top firms listed are American Funds, Franklin Templeton, BlackRock/iShares, and PIMCO and are the only providers mentioned by at least 15% of advisors. Attitudes Towards Retirement Income Product Solutions In terms of breadth of product usage, it is apparent that advisors construct retirement income portfolios using a number of different vehicles and providers and their allocation and level of usage is dependent on a variety of factors and client circumstances. Many advisors use the same products and investments in retirement income as they do in managing accumulation portfolio. As one advisor stated I use the same tools in retirement income as I do in accumulation, I just use them differently. 15 GDC Research and, This research publication is protected by the copyright laws of the United States

16 Advisors generally believe they have sufficient products for creating retirement income portfolios. As discussed earlier in the report, most advisors focus more time and effort on the process of structuring retirement income portfolios than on selecting specific vehicles or products. While most advisors are open to considering new solutions, they are comfortable with the products available to them currently. As one advisor said I already have the products to solve the retirement income puzzle. The product providers seem bent on trying to solve the advice and skill challenge with a product. When asked if they have sufficient solutions available to meet the retirement income needs of clients, nearly two-thirds of the advisors agree with that statement and just 1 in 7 disagree. This is consistent across advisors, regardless of the degree to which they currently serve retirement income clients, the channel they are affiliated with, their preferred approach to creating retirement income or whether they manage investments internally or outsource management. Exhibit 12: Perceptions of the Need for Retirement Income Solutions Have sufficient retirement income solutions available Strongly Disagree, 3% Disagree, 11% Strongly Agree, 24% Neither Agree/Disagree, 22% Agree, 40% Source: Examining Best Practices in Constructing Retirement Income Portfolios by GDC Research and This not to say that advisors are not interested in expanding their investment/product tool kit, specifically using distinct retirement income products such as annuities, absolute-return funds, etc.. But their hesitancy to utilize or adopt newer solutions can be attributed to the following: 16 GDC Research and, This research publication is protected by the copyright laws of the United States

17 Limited Capacity Advisors have limited capacity to keep pace with new retirement income product solutions, with 67% of advisors stating they don t have time to research and evaluate new product solutions. Product proliferation The number of retirement income products and solution is overwhelming for advisors who don t have time to evaluate them. This exacerbates the advisor s capacity issue. Next Generation of Solutions Advisors believe many of the solutions are first generation and are waiting for second or third generation versions in hopes that improvements will resolve product shortcomings. Lack of Track Record New products and solutions are untested in uncertain market conditions. Consequently, many advisors are concerned these new solution may not live up to their expectations years down the road and could negatively impact their client s retirement income portfolios. The opportunity and demand for new solutions will increase. However, product providers will need to increase education, demonstrate how their solutions will add value to the advisors retirement income process, and be patient. Advisors will need time to understand these solutions and see that they do meet their intended need. Specific Actions Taken in Response to Market Downturn The most important actions taken in response to changing market conditions in the past year are shifting portfolios to a more conservative allocation and rebalancing portfolios to be in line with agreed upon allocation targets. Many retirement portfolios were out of balance as a result of the market downturn. In the past year, advisors focused on re-established allocations to target levels. However, in light of the increased focus on managing portfolio risk, many advisors implemented a less aggressive portfolio allocation. Other important actions taken by advisors reflect growing emphasis on risk management. Specific actions include increasing the use of vehicles with low correlation such as commodities and increasing use of guaranteed solutions, specifically variable annuities. There has been much focus and speculation on advisors increasing the frequency of tactical changes within portfolios. However, on a relative basis, making tactical portfolio shifts was not among the most important actions they have taken in the past year. With uncertainty regarding the overall direction of the capital markets, an equal number of advisors increased the use of conservative investments such as money market or short-term bond investments 17 GDC Research and, This research publication is protected by the copyright laws of the United States

18 as decreased the use of these solutions. This underscores the tension among advisors who are balancing a deeper appreciation of risk tolerance with a challenging interest rate environment that constrains the use of traditional conservative investments. Exhibit 13: Most Important Action Taken In Response to the Market Rebalanced Targets More VAs 29% 41% Conservative Allocation More Frequent Tactical Changes More Low Correlation More Conservative Investments Less Conservative Investments More Payout Annuities More Structured Products More Frequent Rebalancing Outsourced Asset Management Delayed Rebalancing Aggressive Allocation 16% 14% 14% 12% 11% 10% 9% 7% 5% 5% 29% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Source: The Continued Evolution of Retirement Income Delivery by GDC Research and A Snapshot of Best Practice Advisors In considering strategies and approaches to serve the retirement income marketplace, it is worthwhile to consider the profile of best practice advisors currently servicing this market. These leading advisors tend to exhibit common profiles and behaviors which make them stand out compared to advisors less engaged with the income marketplace. 18 GDC Research and, This research publication is protected by the copyright laws of the United States

19 Exhibit 14: Best Practice Advisor Key Attributes A Brief Profile of Best Practice Retirement Income Advisors Key Attributes Average of 20 years of experience Team-based Fee-based Focused on affluent clients Provide customized solutions Deliberate in their retirement income efforts Leading Practice Behaviors Be committed to the retirement income market Develop and articulate a well-defined process for planning and implementation Broaden your scope to deliver a more holistic approach that goes beyond investment only support Deepen your approach to client discovery Employ a customized approach to managing portfolios Build an integrated portfolio combining leading solutions Source: The Continued Evolution of Retirement Income Delivery by GDC Research and Concluding Thoughts There is little doubt that the demand for retirement income support will continue to grow rapidly in the coming years. The aging of the baby boom generation is inevitable. While the market downturn may have caused some individuals to delay retirement, transitioning from the work force often happens for uncontrollable reasons related to employment or personal factors. The concept of retirement income takes on different meanings depending on the perspective of those involved. For many product providers, retirement income is a more narrowly defined concept that involves the generation and delivery of income and cash flow to satisfy lifestyle needs of retirees. For advisors, retirement income often encompasses a broader set of issues related to investment management but increasingly involving support for other issues clients face in shifting to retirement or living extended lives in retirement. For clients, the concept of retirement income may reflect an even wider set of needs both expressed and unexpressed and include concerns about managing all sorts of challenges, both personal and financial. 19 GDC Research and, This research publication is protected by the copyright laws of the United States

20 Our examination of this market suggests that the need for advice is great, with few individuals having the knowledge or capacity to navigate the transition without the help of an advisor. This is especially true for more affluent individuals, who will want help in navigating the risks so closely associated with retirement living. Yet it is likely that there will be a shortage of skilled, experienced practitioners available to deliver the retirement income guidance that will be needed. The shortage of skilled advisor can be attributed to the aging advisor base, in-line with the boomer wave that will be exiting the industry faster than they can be replaced. It is also apparent that delivering retirement income support is not an easy task. Retirement income is an inherently customized activity that involves ongoing engagement and interaction. The nature of the support makes it difficult to scale within a practice. Consequently, advisors are attracted to solutions that offer them control and customization yet which also enhance productivity. Lacking industry and enterprise-based solutions, best practice advisors have largely developed and refined their retirement income process in-house over many years. While they have addressed some of the scalability issues, it is likely that capacity both time and expertise - will be a growing challenge. The financial services marketplace including asset manager, insurers, broker-dealers, and thirdparty vendors will need to create more retirement income support such as tools, investment platforms, and training/education to increase adoption of retirement income best practices. The bottom line is that retirement income support is a distinct discipline and one that requires commitment, innovation, and investment to generate a payoff. Advisors who have invested time and effort to specialize in this area have had significant growth in their practices. We anticipate more advisors will grasp this opportunity in coming years and help spur further enhancement of the tools and capabilities available for retirement income servicing. The net result will be a continued evolution of the marketplace and an expansion of the ability of advisors to meet the demands of retirement income clients. 20 GDC Research and, This research publication is protected by the copyright laws of the United States

21 Appendix GDC Research and two leading research and consulting firms recognized for their ongoing analysis of competitive trends impacting advisors including retirement income, advisory/fee-based platforms, wealth management, and practice management offer customized consulting and research support designed to help asset managers, insurance companies, broker dealers, and other organizations jump start efforts to build a more effective retirement income business model. The capabilities we provide include: Research Reports: Retirement Income Series The Continued Evolution of Retirement Income Delivery: An Analysis of Leading Practices in Advisor Support (2Q 2010) page report examining how delivery of retirement income support continues to evolve across distribution channels based on over 100 surveys and interviews Update: Advisor Best Practices in Retirement Income (4Q 2009) - 55 page report incorporating input from over 100 advisors to update findings of previous studies and how advisor practices have changed Examining Best Practices in Constructing Retirement Income Portfolios (2Q 2009) page report focused on advisor practices in retirement income portfolio construction and market impact on their practices based on over online survey of over 500 advisors fielded in conjunction with InvestmentNews Advisor Best Practices in Delivering Retirement Income and Transition Support (3Q 2008) page report covering advice and investment practices of top advisors serving retirees incorporating input from more than 100 interviews Retirement Income Workshops Our workshops are conducted on-site at your offices and provide access to our research findings, market insights and consulting perspectives. Each workshop is tailored to your specific needs and issues Presentations, Webinars and White Papers Using our broad research and understanding of the marketplace, we deliver conference presentations, conduct training sessions, or field webinars to help educate and inform your sales force or intermediary partners on how to tap the retirement income delivery. We also provide customized white papers or communications materials which leverage our research on advisors and retirement income best practices Customized Research, Competitive Analysis, and Consulting Support We are available to provide customized consulting and research support for a range of strategic and tactical issues including: o Developing new products and services o Identifying competitive threats and opportunities o Market testing concepts or new business models For more information about any of our research or other capabilities, please contact Howard Schneider at or Dennis Gallant at GDC Research and, This research publication is protected by the copyright laws of the United States