If you want to engage investors in the retirement planning process, avoid talking about financial planning or worse, retirement income. Both elicit very negative responses from investors, Timothy Noonan, managing director of Capital Market Insights at Russell Investments, said at a media roundtable on Wednesday.
When investors hear advisors say retirement income, they think theyre about to be sold an insurance product and are reminded of their private retirement sins, such as not saving enough or robbing their 401(k)s, he said. And the mention of financial planning is likely to make most investors yawn. The topic is boring and technical, according to a two-year study of major advisor markets in the U.S., Canada and the U.K, commissioned by Russell.
Advisors should talk instead about lifestyle design, a concept that appeals to investors. If you want a get a disengaged person to re-engage maybe you should try talking to them about what you can do to help them design a lifestyle thats sustainable, Noonan said.
Russell Investments has taken the research to heart, naming its recently launched retirement planning tool for advisors Retirement Lifestyle Solution and the tools main software component Retirement Lifestyle Planner. The new tool is based on the concept of adaptive investing, a style of investing that investors are responsive to, according to the two-year study.
Investors see adaptive investing as a middle ground between the investing style extremes of changing asset allocations frequently and not changing them at all. More importantly, it incorporates asset-liability matching, which is central in getting individual investors to engage meaningfully on preparing for their retirement and getting income from their retirement portfolios, Noonan said.
Fundamentally, adaptive investing is managing your portfolio and building an asset allocation that is connected to the spending it has to support, said Rod Greenshields, consulting director of Russell Investments private client consulting group.
One of the major roadblocks to getting investors to think about and plan for retirement is their inability to visualize themselves in the future. By matching their assets to their liabilities in the future, the tool helps investors overcome this visualization difficulty, according to Noonan.
The asset-liability matching approach is not exactly new. Matching assets to liabilities, that is what pensions do, Noonan noted.
While Russell Investments has been helping pension plans with asset-liability matching since its founding, it was unable until now to help individuals because there was no version of the asset-liability matching technology for individuals.
We transferred intellectual property that we had developed to serve pension plans to figure out how we can put that in the hands of an advisor to create asset-liability matching for individuals, said Noonan.
Russells new retirement tool also borrows another concept from institutional pension plans: that of the funded ratio, or the ratio of assets to liabilities, a more robust number with more sophisticated methodological underpinnings than the classic ballpark estimate of how much money one needs to retire, said Greenshields.
It can be a useful communication device to cut through a lot of the noise and the jargon and confusion in financial planning and give your investors one number, but its one number that actually means something, Greenshields said of the funded ratio.
To engage investors, advisors should also remember that personalization and expertise are crucial, according to Russells research. Here again, they should watch the words they use. Tailoring resonates best with investors when trying to convey the idea of personalization.
Unfortunately, many of the tools on the market to sell money-managed products provide cosmetic rather than genuine tailoring, according to Noonan.
If advisors want their clients to engage meaningfully with them on this retirement income question, its got to be an exercise in genuine tailoring, Noonan said.
So, how have advisors responded to the tool? Its still early, Noonan said, but so far client reactions have been extremely gratifying. Advisors are eager for this new conversation and admire the level of precision that the Russell Retirement Lifestyle Planner tool brings to it, he said.
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