A Higher Fiduciary Standard

The boomer generation is living longer than any before it and facing the cost of retirement. Financial advisors are challenged to serve this wave of investors amid increased regulation

There are enough worries for aging Americans at retirement—health concerns, the end of paychecks, and the prospect of living past their savings. Those challenges are happening on a massive scale; 10,000 people will turn 65 every day for the next 15 years. The baby boomers are redefining society once again.

Economists have warned that as this retiree wave rolls in, it could affect the entire economy. One problem might be a large-scale asset meltdown as boomers liquidate and spend down their investments. Given that the 65-and-older age group numbering 41 million people today will increase by 20 percent by 2030, this movement of money is no small matter.

Or maybe not, says Paul Matecki, senior vice president, general counsel, and secretary of Raymond James Financial, a Tampa, Florida-based diversified financial services holding company with 6,300 financial advisors working out of 2,600 locations in the United States, Canada, and overseas. “Most retirees don’t cash out at retirement,” he says. “People are working longer, as they have not saved enough. Some of their assets transfer to the next generation, as not everyone lives to their 90s.”

What’s more worrisome, perhaps, is the number of boomers who have few assets to liquidate. Boomers’ parents, the Depression-bred “Greatest Generation,” were famously frugal and trusted in the pension funds of their longtime employers to ensure their financial security into their twilight years. Most often, that worked. But a generational shift several decades ago began as those company pensions started to disappear, replaced with self-directed 401(k) plans.

Offered the opportunity to save, manage, and grow tax-deferred income that could amount to more than what a pension plan might have given them, some boomers did well. But others did not or could not. A study by the Employee Benefit Research Institute found that 56.7 percent of early boomer households are “ready” for retirement, with the balance having shortfalls of $93,576 for single men and $104,821 for single women. In family units, it is $71,299 per family member. Approximately four in ten boomers have no retirement savings at all.

Exacerbating this problem, many boomers borrowed the equity in their homes, leaving them today with
diminished real estate value, as well.

Some near-retirement boomers are attempting to catch up. But given their life stage, they are advised to invest more conservatively in lower-risk, lower-return investments. Their better-cushioned peers who have adequate savings aren’t necessarily comfortable either since increased longevity means those nest eggs might have to last 30 years or longer.

Financial advisors from companies like Raymond James do their best to work with private investors of all sizes, and as should be clear, those investors come from a spectrum of needs and resources. “There are a plethora of investment opportunities,” offers Matecki. “With more products and the fact that boomers are more sophisticated about investing, there are many things we can do to help people with planning and savings.”

Historically, some financial products and sales methods have proven harmful to savers. The financial services industry has had some “bad apples,” which government regulators continue to curb with new guidelines for broker dealers. The Securities and Exchange Commission (SEC), together with the Financial Industry Regulatory Authority, issued a National Senior Investor Initiative report in April 2015 to address how financial advisors work with this somewhat
vulnerable population.

Bearing the weight of so many people with savings that need protection, heightened scrutiny on the industry may be warranted. The Department of Labor, which concerns itself with retirement funds, has sounded the alarm about poor broker practices relative to 401(k) rollovers and other savings programs.

Of course the rules apply across the board for this industry. The “good apples” make up the vast majority of the industry, says Matecki, and they understand a general need for heightened regulation. “We are handling individuals’ life savings,” he notes. “This is more important than buying a home, where regulation has also increased.”

As proposed, the guidelines establish stricter standards for brokers and financial advisors who work with retirement account investments. Intended to protect savers, it is widely seen as placing limits on how and to what extent brokers can be paid for their advice and services. The intent is to require that all investment recommendations be in the best interests of the investor—known as the “fiduciary  standard;” critics say current regulations allow for unwarranted higher fees.

Mary Jo White, chair of the Securities and Exchange Commission, has gone on record supporting a uniform fiduciary standard that would apply to brokers as well as investment advisors (the two are distinguished from each other in that brokers can execute trades, while an advisor provides comprehensive planning services, including investment management and estate planning). She cites calculations from the Council of Economic Advisers that show what happens when middle-class families roll over their 401(k) dollars into individual retirement accounts, typically when leaving a job or retiring: they effectively lose the protections of federal pension laws. The consequences are that those families lose about 1 percent in annual returns on their savings, which adds up to $17 billion in losses to all such investors every year.

But it’s a complicated scenario, explains Matecki, particularly because the proposed rules can be read to say the cheapest is the best for a client. These are investments that impact middle-class families in life-altering ways. “Our industry is concerned that, in some cases, what’s in the best interest of the client may not be the lowest-cost option,” he says. “Commissions charged on stocks and bonds are fairly clear. Mutual funds involve fees to multiple parties, such that who receives money is opaque. And sometimes investments that cost a bit more up-front may be in the client’s best interest.”

Another concern is for smaller investors: boomers who were unable or unwilling to join investment programs earlier in their careers (e.g., the 55-year-old hoping to open a mutual fund account with $1,000, the minimum contribution). Under new regulations, it may become too expensive to service these limited-asset customers. Matecki says one option is to instead charge clients consultation fees, but it’s not hard to imagine that such up-front charges would dissuade people from seeking counsel altogether.

The scenario would be a doubly vexing problem as the investor ages and, very often, experiences cognitive decline. Stories of elder abuse, conflicting wills, and quarreling heirs are the stuff of celebrity families as well as the average investor. Battles are over money, and the financial advisor can sometimes forestall the fight. “We recommend obtaining client authorization to reach out to other family members if the unfortunate event of dementia or other debilitating illness strikes,” explains Matecki. “We have to ask the what-if questions and sometimes address difficult situations.” Embedded in these situations are privacy questions and occasions in which it appears a relative or caretaker is taking advantage of a client with Alzheimer’s disease or another debilitating chronic illness.

On the flip side, aging healthily is more likely than ever before. While this is, overall, good news, running out of money can keep an otherwise sprightly nonagenarian off the golf course, from which much of that vitality might derive. One way to address this phenomenon of the long-lived retiree is the longevity annuity.

Annuities come in various forms—fixed, variable, equity index—with different tax and payout implications, all of which enable annuitants to choose a product that offers the best return relative to their life variables: how long they expect to live, when they wish to start drawing income from the annuity, and whether or not it can be passed on to a surviving spouse.

How realistic are people about their chances for living longer? Family histories help, as does the absence of preexisting illnesses and conditions. Some annuitants purchase them with a rollover lump sum, and others pay a premium over time. A financial advisor necessarily needs to factor for inflation, which specific annuities make sense given the taxable status of the source funds (the tax-deferred rollover), and whether or not clients are being realistic about their anticipated lifespans.

“These can make sense in an era of better health,” says Matecki. “But they still need to meet the standards of suitability.”

The next generations have their own financial challenges ahead, given their high tuition debt and difficulties getting home mortgages. But data show they are less inclined to take on additional debt and are adept at using digital tools to manage finances. Reportedly, this comes from observing their parents’ struggles.

How the new regulations will affect these many life-stage and family factors remains to be seen. It would be unfortunate if smaller-asset investors were deprived of nuanced, in-depth counsel.