Pershing

The Retirement Landscape: An Interview with Teresa Epperson of Mercatus LLC

Issue 6 - May 2009

Teresa Epperson is a founding Partner of Mercatus LLC. She works closely with large retail financial services organizations to develop business strategies that provide competitive advantages and help them design and deliver effective distribution programs. Reflecting Mercatus’ retirement marketplace expertise, Ms. Epperson led a landmark study series in 2007 and 2008, sponsored by the Bank Administration Institute, focused on retirement preparedness in the United States. Ms. Epperson has spent more than 14 years in the financial services industry, including leadership roles at Fidelity Investments and FleetBoston.

How do you view the current retirement landscape?
The retirement business offers two opportunities: individual investors and the employer plan market. Until recently, many firms viewed retirement as primarily an employer plan or “workplace” opportunity. However, the rise in the importance of the personal side of retirement began several years ago with the increased reliance on defined contribution plans, as the threat of the disappearance of traditional safety nets like pensions and Social Security became a bigger issue. Today, many clients view retirement as an important goal for both personal and workplace investments.

So, to succeed, firms need to focus on the entire retirement picture?
In our research, we are finding that the retirement relationship needs to be holistic. Often, when an investment professional has the client’s work relationship, they can get their personal relationship as well.

At the end of the day, the real safety net is an investor’s entire picture: their workplace retirement account and their personal retirement and taxable savings. Firms are waking up to this; but it was a blind spot for quite some time. Now, however, they are thinking about the retirement portfolio; and realizing how the retirement relationship can have a significant impact on capturing a greater share of the overall portfolio.

How has our current economic environment changed perceptions of retirement?
For some time now, investors have been expressing angst over their future well-being in retirement. We are seeing this angst and concern grow with the recent turmoil in the markets and the economy. There has been a real up-tick in interest in retirement planning and working with an investment professional, as well as an increase in investors’ willingness to pay for that advice.

Due to the continued downturn in the economy, investors are waking up to the fact that not having a plan, not thinking about a plan and not properly diversifying one’s investments can have serious consequences.

What about the perception of the people providing the advice?
The banking environment, credit crisis, mortgage debacle and scandals all add up to a crisis of confidence in financial institutions. Investors are asking, “Who do I trust? Who’s going next? Do I trust this person (investment professional)?” For investment professionals, the challenge is to ensure that they do everything they can to continue to build trust and develop strong client relationships.

Investors are not only evaluating the investment professional as an individual, but also the institution with which the investment professional is associated. Established financial services institutions will be seeking to leverage their long history to build and strengthen trust with prospects and clients. There will continue to be a client flight to quality to institutions they perceive as more trustworthy and financially solvent. Investment professionals need to make sure their affiliations, platforms and solutions support the investor trust value proposition.

Has anything changed in the “life-stage” approach to retirement planning?
The life stage approach to retirement planning still applies, and it now more important than ever. What investors need for retirement planning in their 20s and 30s is dramatically different than the needs of people in their 50s and 60s. What has changed is the traditional definition of retirement. Today, retirement for many retirees means they will need to continue to work to supplement their income; those investors close to or in retirement do not have the “runway” of 10-20 years to rebuild their portfolios.

From a pre-retiree and retiree standpoint, they need to ask themselves, “Given the current economic environment, what do I need to do?” Investors are seeking guaranteed income and have become more risk averse. Suddenly, investors are investing away from equities (which wasn’t true for a whole generation). And there is acute investor interest in “outcome over alpha”—they want to make sure that they have what they need when it comes time to retire.

What products, then, are investors looking at to “get what they need?”
“Managing risk” is a big priority—and a new priority for most investors. For the past few years, “life stage” or “life cycle” funds have been popular; but most were not built to deal with the kind of volatility recently experienced in the marketplace. These products were designed to offer investors peace of mind with the knowledge that their asset allocation would adjust to match their stage in life. However, they need to evolve in order to better deal with market volatility.

These funds have greatly benefited from a regulatory environment that allowed defined contribution plans to use them as their default option. However, the regulatory environment will, in all likelihood, change as a result of recent market events. We may see regulators require that a portion of defined contribution assets go into guaranteed products.

As for Individual Retirement Accounts (IRAs), they will continue to grow, as assets continue to roll out of defined contribution plans. What will be interesting to see is how the products within the IRA marketplace evolve. One of the trends we are seeing is much greater marketplace interest in IRAs funded with bank products, such as CDs. Some providers have hybrid IRAs with more flexibility, offering both bank and brokerage vehicles within the same account—a trend toward much more open architecture.

How do investors learn more about their options?
More and more investors are using the web to learn about their options and to build confidence as they prepare to speak with providers.

Investment professionals need to be cognizant of the role the web plays in the investor decision-making process regarding with whom they choose to work. If providers don’t have a web presence, or a robust enough presence, there is a real risk of being missed by potential clients when investors begin to look for help.

Is there potential for “information overload?”
Providers must deal with the fact that investors are going to do their research; and if they aren’t getting the information from you, they are getting it from someone else.

Institutions with large investment professional distribution channels have traditionally avoided building out robust, direct capabilities because it was perceived as a threat to the investment professional channel. Now we are beginning to see a shift in thinking, an understanding that having a strong online presence allows the investor to gain confidence in their investment professional and the institution. In a world where people are used to getting immediate access to information through the internet, the bar has been raised on accessing financial services and investor information. Easy access to tools, information and reporting can be complementary to and, in fact, strengthen, the investment professional experience.

Given this, what is the current—and future—investment professional-client paradigm?
In the current environment, clients are seeking a higher degree of engagement with their finances, with a desire for increased access, monitoring and alert capabilities. At the same time, clients will still value their investment professional relationship. As a matter of fact, for many investors, their investment professional is going to become more important.

Over the next decade, we are going to see that the most successful and fastest growing investment professionals are those that integrate investment professional-delivered advice and guidance with robust tools and information that allow investors to independently evaluate, explore and plan their finances. This is true especially for retirees, for whom this is not just about a safety net: it is about their freedom.

To learn more about tools and information available, contact your home office.

Teresa Epperson
Founding Partner of Mercatus LLC

For Professional Use Only.