A new report offers financial advisors a low-cost strategy for delivering retirement planning to the wide population of people who have limited assets.
“As defined benefit pensions have been replaced by investor-directed defined contribution plans, implementing sound investment policies for retail investors of modest means has become a problem of increasing urgency,” the authors state in a recently released paper entitled, “Lean Advice for New Investors.”
The authors of the paper—Jarrod Wilcox of Wilcox Investments of Newton, Mass.; Zvi Bodie, professor of finance and economics at Boston University; and Dan diBartolomeo of Northfield Information Services—describe their strategy as an “affordable prescriptive blueprint” for delivering financial advice to the masses.
“This is practical advice based on correct principles,” Bodie said in an interview. “Even now, many planners just use off-the-shelf strategies for their clients, where they only need your age and when you plan to retire. A typical example is target-date funds that use the rule of thumb for equities percentage of 100 minus your age. It’s not very sophisticated.”
The authors state that their strategy involves limited face-to-face contact with clients and basic strategies and technology that gives advisors a low-cost way to deliver their services to an audience that is desperately in need of professional advice.
“While somewhat U.S.-centric, our framework can be put to practical use in any country,” they wrote. “We envision implementation as a low-cost tier service using simple technology that permits mass customization with limited in-person contact.”
Bodie, who is a prominent critic of equity-centric retirement planning, said the low-cost strategy leans heavily on ensuring an adequate stream of income.
“A lot of investment advice is based on the fallacious idea that stocks are safer in the long run, but with this category of investor, we disagree,” Bodie said. Instead, what’s “safe” is ensuring the most critical long-term goal—that of “at least a minimally satisfactory post-retirement income”—is met, although medium-term goals of an emergency fund or saving for home ownership can also be accommodated, he said.
With this in mind, the rules for offering this kind of assistance to a low-asset community must be straightforward and focused on where the most value can be added at the least cost, the paper states. Therefore, it’s the younger, new investor who should be targeted, as the needs of this subgroup are relatively simple and because the payoff over their potential lifetime is huge, the paper stated.
Following these basic guidelines can help a financial planner get such a program off the ground:
• Don’t spend time trying to increase financial awareness at first.
• Leave complex investment strategies to a later stage.
• Focus on clients who apply for your assistance and persist over time.
• Clients can be required to have some basic tools and skills in place, like a bank account for savings, and an understanding of their extended balance sheet after a brief introduction.
• It’s easier to work with new investors, not those with established ideas and habits.
• Re-evaluate the investment strategy if there is a marriage or big salary promotion; otherwise once overy three years is enough.
To get a client started, Bodie and his colleagues suggested potential clients turn in a “readiness exercise” that demonstrates some of the above needed skills, even with estimated numbers, an example of which appeared in the paper. “Expressing frustration for how difficult it is to come up with accurate numbers should be expected. However, if the applicant does not understand the problem or has no facility or patience with arithmetic, he or she needs more preparation from other sources or should seek alternatives,” they wrote.