November 2012

Perspectives from Anna: Retirement and Financial Advice – What I Heard At Two Recent Meetings

By Anna M. Rappaport

The 2012 Pension Research Council Symposium at the Wharton School focused on “The Market for Retirement Financial Advice.” This topic is outside of my usual area of work, but I found the meeting to be of great interest. Just after that meeting, I attended my second Financial Planning Association (FPA) Retreat. I again found that the group was very hospitable and welcoming. That meeting also focused on advice, in particular on a number of technical and practice management ideas, and on the future. In this “Perspectives,” I will focus on what I found most interesting at both of these meetings and how the themes weave together.

(The Pension Research Council will be posting presentations at

Context and Different Ways that Advice Is Provided and Regulated

Retirement savings are located in pension plans, individual retirement accounts (IRAs) and other personal savings. In thinking about retirement resources, it is also important to consider housing values and human capital. My view is that the employer is important in savings—many people would not save without an employer plan, or if they did, they would often save less than they do today. Major portions of American retirement assets are in IRAs, but much of that money came through roll-overs, so the original savings were in employer plans.

The population falls along a wealth spectrum. At the lower end of the spectrum, people have only social insurance benefits, and the private advice market does not serve them. At the higher end, people are mainly concerned about managing and preserving their assets, estate planning, etc. While many advisors prefer to work in that space, the advice provided is usually not heavily focused on retirement, so that is not where my main interests lie. Instead, I am most focused on the middle market, a group that is underserved by financial advisors.

There are different ways that advice is provided:

  • Directly to the individual who hires the advisor: Most of the Pension Research Council papers dealt with this topic. The FPA Retreat dealt primarily with advice delivered one-on-one.
  • A variation on this theme is for the advisor to be linked to a mutual fund or financial service company. The individual with assets in the mutual fund of more than a minimum amount has access to the advice and planning services offered by the fund company.
  • Through the employer, either using a service with an automated organized process or by hiring individual advisors. The Pension Research Council papers by Jason Scott, and by John A. Turner and Dana M. Muir, addressed employer-provided or sponsored advice.

Note that in ERISA plans (a subset of all employer-based plans), when the employer provides the advice, there are additional legal issues to be considered, and a different regulatory structure.

There are several different types of business and regulatory models in the individual advice market. For a good overview, see Exhibits I and II in the Pension Research Council paper authored by Jason Bromberg and Alicia Puente Cackley of the Government Accountability Office (GAO). The three main types of advisor relationships described there include:

  • Investment advisor—subject to fiduciary standard set forth in Investment Advisers Act of 1940 and regulated by the Securities and Exchange Commission (SEC) and states. Regulations regarding “standard of care” require that the advisor has an affirmative duty to render services solely in the best interest of clients, and it requires advisors to disclose material conflicts of interest.
  • Broker-dealer—subject to suitability standard and regulated by the Securities and Exchange Act of 1934, rules of the SEC and the Financial Industry Regulatory Authority (FINRA), and individual states.
  • Insurance agent—subject to different suitability standards and regulated by state insurance departments.

The fiduciary standard applied to individual advisors requires that the advisor act in the best interest of clients. At the FPA Retreat, I heard discussion favoring the general applicability of such a standard. The business model of the investment advisor generally calls for payment in the form of a percentage of assets under management, or fees set as a retainer or on an hourly or project basis. By contrast, broker-dealers and insurance agents are generally paid commissions. Some firms may serve in both roles. Some investment advisors and representatives of brokerage firms are salaried.

Two Different Ways of Promoting Action—Structural vs. Active Guidance

There are two very different ways of providing “messages” that guide action: one uses system structure and architecture, and the other focuses on personal interaction (structural guidance vs. active guidance or advice).

In a defined-contribution (DC) world, defaults and choices are very important, and the role of advice is very different depending on defaults and plan choices provided. This is extremely important in employer plans. System architecture and structural guidance set up the background for active guidance and advice. “Doing things” for people is often viewed as more effective than educating them. Managed accounts, defaults and target date funds are examples of methods of “doing things” for people. They are a form of structural guidance.

The Pension Research Council discussions focused more on active guidance and advice, but employers often seek to offer structural guidance. Hence advice is more of an add-on, providing support to help participants use the system well. The Kelli Hueler and Anna Rappaport paper presented at the Pension Research Council focused on both forms of guidance.

At the FPA Retreat, there was discussion on the future of technology and on serving the middle market. In both of these discussions, there was focus on structural guidance and on system architecture. The strong message that I heard is that we can expect a shift to much more structural guidance in the future.

Issues that Arise as We Think About Advice

There are many different educational programs and designations for those who give financial advice, as well as multiple regulatory systems and roles.

Advisors may be salaried or paid as percentage of assets under management, a retainer, commissions, a project fee or an hourly rate, among other arrangements. Concerns raised in the Pension Research Council discussion included conflicts of interest and lack of transparency.

The legal system uses various methods to mitigate conflicts of interest, including disclosure, prohibiting specified actions and imposing fiduciary duty. These are detailed in the Turner and Muir paper. The legal system is evolving, and there is a lot of controversy about the best regulatory structure for the future.

All of this can be very confusing to the consumer.

Different Views

The Pension Research Council paper writers offered widely divergent views on how successfully the system is working today. Several authors pointed out concerns about conflicts of interest, consumer confusion and financial literacy. It appears that much advice is focused on investments, while other issues are equally or more important for the middle market. Decisions related to retirement vary by life stage, and are different during accumulation vs. the period of using funds. The paper by Alicia H. Munnell, Natalia Sergeyevna Orlova and Anthony Webb focused on some of the most important decisions, and pointed out that working longer and time of Social Security claiming are very important for retirement success. The Society of Actuaries (SOA), in its “Decision Briefs,” highlights issues of importance in the middle market.

There were also several papers on evaluating the effectiveness of financial planning, showing rather mixed results. At the FPA meeting, the focus on implementation included a discussion of the fact that advice that is not implemented is not effective. One of the participants in the middle market focus groups pointed out that his firm uses client meetings, not just to discuss what to do, but to actually do it. For example, if the topic is 401(k) asset allocation, they do the re-allocation in the meeting. If the topic is how to enter data, they enter some of the data.

At the Pension Research Council, there was discussion of how to build a well-functioning system. The study by Andreas Hackethal and Roman Inderst offered ideas for expanding transparency and competition. This paper was written from an international perspective and showed that there are parallel issues in many jurisdictions. The Hueler and Rappaport paper provided an illustration of the range of competitive quotes in annuity bidding, and showed how valuable competitive bidding is. The relative positioning of carriers varies from bid to bid, and the spread between high and low can be considerable.

Four Types of “Intellectual Frameworks” that Underlie Advice

A Pension Research Council paper by Paula Hogan and Rick Miller sets forth four different frameworks for planning:

  • Traditional—Accounting/Budgeting/Modern Portfolio Theory
  • Rational—Life Cycle Theory of Investing
  • Behavioral—Prospect Theory and Family
  • Advisor Experience—Life in the Trenches.

These authors noted that the scope of what the advisor does varies depending on the model. Moreover, the traditional model is focused on investment advice and purchase of financial products; a life cycle approach focuses heavily on human capital; and the advisor experience model adds specific focus on a wide variety of life decisions going beyond investment, financial products and human capital. The authors position risk in each of these. For more information on this topic, look at the paper. It will be available on the Pension Research Council website.

Focus Groups on the Middle Market

During the FPA Retreat, focus groups were held to understand how planners approach the middle market. The focus groups were jointly sponsored by the FPA, the SOA and the International Foundation for Retirement Education (InFRE). I was very pleased to be able to represent the SOA at the focus groups. The groups included planners who serve the middle market, some of whom have found successful ways to service this market. Others preferred to limit their practice to higher-net-worth people.

Some of the highlights of the focus group discussion included the following:

  • Organized and efficient processes are needed for success in this market.
  • For this group, planning is more about cash flow and debt management than about asset accumulation.
  • Planners differed in their business models. Some charge a flat fee per service; some a retainer; some rely on commissions; and some charge by the hour. Generally, the client will know in advance what to expect for a fee.
  • Some middle market clients will build assets and grow into higher-net-worth clients.
  • Middle market clients nearing retirement have different decisions to make than higher-net-worth clients.
  • Middle market clients generally need insurance.
  • Some firms try to match newer planners who have recently joined the firm with middle market clients.
  • Newer software allows clients to enter their data, and allows processes where the planner and client can both see the data.
  • “Big book” plans are not needed for this group of clients.

It was noted that technology will be very important in the future and that many of the questions and problems these clients face can be solved without extensive research. A full report of the focus groups is to be published later this year.

More Ideas

Trust was a major theme of the FPA Retreat. In the opening session, Margaret Heffernan focused on how we think about trust, and how we might rethink making trust work well in the planning relationship. She pointed out that some people are too trusting, leading them to blindly accept what they hear from a trusted source, rather than thinking about it critically. She also pointed out the herd instinct and the danger of following what others do without thinking it through and how it can lead to many mistakes. She suggested the need to frame the relationship so that the advisor and client become “thinking partners” and work together to think through solutions and evaluate them. It seems to me that the idea of “thinking partners” can be applied well in many types of consulting relationships. Heffernan is the author of Willful Blindness.’s description of Willful Blindness says:

“Margaret Heffernan argues that the biggest threats and dangers we face are the ones we don't see—not because they're secret or invisible, but because we're willfully blind. A distinguished businesswoman and writer, she examines the phenomenon and traces its imprint in our private and working lives, and within governments and organizations, and asks: What makes us prefer ignorance? What are we so afraid of? Why do some people see more than others? And how can we change?”

Behavioral finance and how people understand information and make decisions is a key issue. In both meetings there was quite a lot of focus on understanding the way people think about financial and planning issues, and how that affects planners and their clients.

The closing session of the FPA Retreat by Daylian Cain from Yale University discussed behavioral finance. He focused on framing, overconfidence and other ideas, and on how to understand how we think so as not to make mistakes. I was very interested in the focus on how we think and how to use that information to improve financial decision making and client/advisor relations, because actuaries also need to explore the implications of behavioral finance for our practice. Actuaries today must be aware of how to structure programs and build “nudges” into their design. The focus at the meeting seemed to me to be more about how to structure the relationship, while taking into account recent research on how people behave. There were several sessions during the meeting focused on trust and effective relationship building.

Another theme was getting things done. Concern was raised that people get advice and walk away. Dr. Moira Somers talked about why change is hard, and how to get people to take action. She gave a number of tips to turn ideas into action. Some of the focus group discussion about the middle market also explored this idea.

The FPA Retreat discussions sought to bring together some of the diverse ideas underlying planning, similar to those articulated by Hogan and Miller at the Pension Research Council. The lifecycle and life in the trenches perspectives broaden the role of the planner to think about life planning, and not to be limited to financial matters. Several of the sessions focused on important life planning issues and how planners are incorporating them into their practices. Bonnie Bell is a career planner working within a planning firm and bringing career planning to the firm. Planners also discussed how they consider the nature of the career and stability of earnings, as well as expected future earnings in setting investment strategies and savings goals with clients. There were also sessions focused on planning needs later in life, including caregiving and health issues. This is useful given that SOA research shows that many people have too short a planning horizon. Lewis Walker talked about how he gets clients to focus on periods later in life. He draws a timeline starting with their current age, and then focuses on 10-year intervals, going to higher and higher ages. Walker and Maria Forbes discussed planning for caregiving and long-term care needs. They focused on using team building and management techniques where there are several people in the family to develop an integrated plan for caregiving. They discussed a situation where adult children in a family had to work together for 14 years to help their parents. I was quite impressed with the tools and techniques they use for team building and producing a better result in a difficult situation. Walker has a new book focusing on helping people plan for caregiving. End-of-life issues were also discussed by Susan Fox, a lawyer specializing in advanced directives. She discussed some of the issues in getting them right. These resources helped planners focus on how to find and use resources to provide or recommend more in-depth help on a variety of issues.

Future of Technology

Michael Kitces gave an outstanding presentation on the future of technology. That session focused on Blue Ocean Strategies—thinking about firms reinventing processes for a fraction of the cost. Such strategies permit quantum leaps and are not focused on incremental changes.

Technology has changed planning in many different ways. Here are some examples:

  • Some planning is offered totally online.
  • Many planners have their clients enter their own data.
  • Modern systems permit all of the information to be accessible to both planner and client.
  • Meetings can be conducted in person or on the Internet or phone.
  • Clients do not need to be in the same geographic area.
  • Social networking influences the relationship building of younger clients.
  • Technology companies are entering the planning business.
  • Niches will grow.

An Uncertain Regulatory Future

Two sets of definitions/regulations define who is a fiduciary and set forth standards:

  • Those that apply to individual Registered Investment Advisors—SEC
  • Those that apply to ERISA plans—Department of Labor (DOL).

The Pension Research Council paper by Arthur B. Laby contrasted the standards that apply to the broker-dealer and the Registered Investment Advisor, and the past attempts to unify them and apply fiduciary standards to all of them. It offered a historical perspective and brought that picture up to date, but it omitted the insurance agent from the picture. It also mentioned the issue of ERISA fiduciary and the overlapping issues of ERISA fiduciary with the standards applied to advisors connected to individuals.

The Turner and Muir paper discussed fiduciary standards and brought in the role of the U.S. DOL. It explained the difference between rules that apply to qualified plans and individuals. It focused on fees, transparency and conflicts of interest, making it germane to this theme.

There have been numerous historical attempts to unify standards or change regulatory structures. While the Laby paper looked at unification of and extension of fiduciary standards, the work by Bromberg and Cackley set forth four alternative regulatory structures.


A key question for planners and those using their services is whether the planner can help the client manage his assets, income and expenditures over the life cycle. Most advisors help with assets, and more are helping with broader issues.

In multiple jurisdictions, common themes can be found. Advice is needed, particularly by the middle class, but there are gaps in how well the market addresses the issues. Transparency, conflicts of interest and competition are issues in the design of systems that will enable individuals to get good information and advice affecting access to financial products and planning. The trend to DC plans makes this more important but does not solve the challenges. Employers continue to have an important role.

Structural guidance and advice should not be forgotten, as they offer promise to help simplify and streamline complex situations. Information and advice are important to actuaries, as they shape how successful the systems that we design will be.

Anna M. Rappaport, FSA, MAAA, is an internationally known expert on retirement strategy and frequent author and speaker. She chairs the SOA Committee on Post Retirement Needs and Risks. She is the president of Anna Rappaport Consulting and can be reached at