The IRA market is the single largest sector of the
retirement market, topping defined contribution plan and defined benefit
markets assets and the fastest growing one, according to the research firm
Cerulli Associates.
IRA assets total $9.2 trillion and they grew at a
compounded 9.7% annual rate between 2012 and 2017, representing a “significant
opportunity for financial advisors as well as asset managers and account
providers,” according to Cerulli.
In two recent retirement reports, Cerulli analysts include
several recommendations about how advisors, asset managers and IRA providers
can best serve the IRA market.
1. Segment IRA clients by age.
“Age-based segmentation is a useful method to uncover
trends among the broad population of IRA owners” and to help determine “the
most effective engagement strategy,” such as email, social media or phone call,
according to Cerulli.
As of year-end 2017, IRA investors 60 and older accounted
for 70% of IRA assets, or nearly $6.5 trillion, and those 50 to 59 accounted
for 20% of those assets. That leaves just 10% of assets, or less than $1
trillion, held by investors under age 50.
One part of that latter demographic, investors under 40,
own just 2.7% of IRA assets, but they represents the biggest potential IRA
market for advisors and others because unlike boomers, who will be withdrawing
funds, these investors will be accumulating and growing assets.
“View the small balances of today as the potential large
balances of tomorrow,” Cerulli analysts write.
2. Establish relationships with next generation
of investors.
Advisors should target these investors not only to expand
their client base but also because many young investors will be inheriting the
wealth of their parents in the future, feeding into those potential large
balances.
Moreover, more than 25% of IRA owners under age 30 and 40%
of IRA owners between 30 and 39 who use a financial advisor work with one who
has served their parents or other relatives.
One way to retain those younger clients is to connect them
with younger advisors in the firm because like most clients, young IRA owners
prefer to use an advisor who can relate to their life experience.
3. Learn about Social Security claiming
strategies and health care expenses.
At the opposite end of the age spectrum are the older IRA
account owners who will be collecting Social Security and paying an increasing
amount of money for health-related expenses.
“Given the idiosyncratic nature of retirement income
planning, investors generally require the assistance of a financial
professional,” according to the Cerulli report.
Unfortunately, according to Cerulli, “some financial
advisors are not necessarily well-versed on nuanced topics as Social Security
claiming strategy or health expense,” which presents an opportunity for asset
managers. It also presents an opportunity for advisors.
Close to half the 401(k) participants between ages 60 and
69 surveyed by Cerulli expect Social Security will be their primary source of
retirement income.
4. Develop drawdown strategies for assets.
These strategies, too, relate to older clients. They
represent a phase that is “far more complex than the accumulation phase” for
assets because retirees often rely on a mosaic of sources such as IRA savings,
401(k) savings and Social Security, for retirement income,” according to
Cerulli.
Advisors can play an important role in helping pre-retirees
and retirees decide on drawdown strategies. About one-quarter of 401(k)
participants age 45 and older surveyed by Cerulli weren’t clear about
what to do with their accounts once they retire. Another 25% said they expected
to consult their current financial advisor for assistance, and 9% said they
planned to engage an advisor for that purpose.
“This data highlights the role of advisors in supporting a
thoughtful and sustainable drawdown strategy,” according to Cerulli.
The drawdown phase also has implications for taxes, the
duration of income and lifestyle in retirement — issues clearly in advisors’
wheelhouse.
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