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Closing the Knowledge Gap: Findings from FPA and AARP Social Security Research

SSSocial Security is a complex thing for your clients. At what age should they start benefits? What are the rules?

Turns out, Americans surveyed by the Financial Planning Association (FPA) and AARP aren’t very knowledgeable and they’re not going to planners or other experts for help. Read the full report here.

“The survey sends a clear message,” Jeannine English, president of AARP, said at a press conference Sept. 28 at the FPA Annual Conference—BE Boston 2015. “Most future beneficiaries lack the knowledge they need to make good decisions they need about Social Security.”

This knowledge gap could cost future beneficiaries many thousands of dollars and it not only affects them but their loved ones as well.

“I know from hands-on experience that Social Security is the cornerstone of any retirement plan,” said FPA President Ed Gjertsen, CFP®. “If it’s not addressed properly, beneficiaries and families can really miss out.”

They think they know Social Security, according to the research. Nearly a half of those surveyed said they are “very” or “somewhat” knowledgeable about how their benefits will be determined.

The reality is that most Americans can’t afford a financial planner, so how do we close the knowledge gap for them? That’s a question Sharon Epperson, senior personal finance correspondent at CNBC, posed to a panel of professionals at the closing general session at BE.

“Financial planners are key in helping your clients and consumers know the information about Social Security in order to make the best decisions for them,” said Gary Koenig, vice-president of financial security at the AARP Public Policy Institute.

While planners won’t be able to give all the goods away for free, Koenig suggested they get involved with virtual and in-person “town halls” AARP is planning to host across the nation for consumers who don’t have access to a planner.

The key takeaways when combining the data on what consumers said and what CFP® professionals said regarding Social Security:

  • CFP® professionals expect that Social Security will be a lower percentage of retirement income for their clients than consumers estimate, reflecting the data showing that those who used a professional financial adviser are more affluent than those who had not.
  • Consumers think they are more knowledgeable about how their Social Security benefits are determined than CFP® professionals believe their clients are; 9 percent of consumers say they are very knowledgeable compared to the 1 percent of CFP® professionals who believe their clients are very knowledgeable.
  • CFP® professionals are twice as likely to say they are very confident that the Social Security system will provide their clients with benefits at least equal in value to those received by today’s retirees (14% versus 7% of consumers).
  • CFP® professionals were far more likely to correctly identify 10-20 years as the length of time the trust fund would remain solvent (50% vs 27% for consumers), whereas consumers thought it would be exhausted earlier.
  • Nearly three in 10 (28%) CFP® professionals recommend to clients that they wait to claim benefits until age 70, but only 13 percent of consumers plan to wait that long.
  • More than 90 percent of CFP® professionals recommend that clients check their estimated Social Security benefits at least once every couple years, yet only 64 percent of consumers have done so in the past two years.

One thing consumers could do—your clients included—is sign up for a My Social Security account on the Social Security website, said Dr. Thomas Hungerford, the associate commissioner for retirement policy at the Social Security Administration.

This is where consumers could find answers to common questions about benefits, have access to their Social Security Statement (as the SSA isn’t sending out paper reports anymore) and find out if there are any errors with their earnings so they can figure out how to fix them.

“The people who are approaching retirement are probably more computer savvy, so we do have a lot of web-based resources,” Hungerford said. AARP also offers a plethora of helpful calculators and tools on its website.

According to Jeannine English, now is the time to fill the knowledge gap for tomorrow’s retirees, because “many people don’t realize how much they will need Social Security.”

HeadshotAna Trujillo
Associate Editor
Journal of Financial Planning
Denver, Colo.



Editor’s Note: Watch the full press conference here:

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When It Comes Insurance Planning, It’s OK to Pass the Baton

Life InsuranceLife insurance isn’t sexy. It’s kind of like the orthopedic shoes you should wear when you’re doing something that requires walking all day long—not sexy but probably a good idea.

According to a 2013 survey by Saybrus Partners Inc., less than half of advisers surveyed said their efforts to provide life insurance and pertinent advice were successful. Mostly, Financial Advisor Magazine reports, because they feel it detracts from their “regular” business—like the business of investment management.

Clients of all ages may be reading about life insurance and misunderstanding the specifics so they either forego it or make costly mistakes. So brush up on your life insurance knowledge and figure out the best way to address the topic—even if it means passing the baton to a more knowledgeable professional.

Clients Need Help, Are Underinsured
Many articles out there are telling consumers what they should be getting from financial advisers, and one of the most consistent things on those lists is insurance planning.

Unfortunately, the insurance business is complicated and with potential mistakes lurking—like rate increases that come as a surprise, lapses in updating beneficiaries on the policies and missteps with estate taxes—clients need help.

And many clients are underinsured. According to data from the insurance industry association LIMRA, more than 50 percent of consumers ages 25 to 64 are without life insurance coverage. About 44 percent of those have a real need for it, says Kellan Finley, the managing director of the insurance consultancy firm Insurance Decisions.

“The gap between service models can be maddening for clients,” Finley says in an op-ed she wrote for Financial Advisor IQ. “It also elevates the risks that clients face when preparing for retirement or a serious life event.”

Life Insurance at Any Age
It’s time for the youngsters to start thinking ahead also.

Here’s a tip courtesy of Yaron Ben-Zvi, the co-founder and CEO of Haven Life, an online insurance provider: direct your young millennial clients to get life insurance. Sure he may be biased, but he brings up a good point: millennials have debt of all kinds from student loans, mortgages and car loans. If they co-signed for any of those with a partner or a parent, those folks will be saddled with a heavy burden should the millennial client die.The Journal’s September issue will be all about the next generation of planners and clients, and the issue (look out for the link on our Twitter page come September) is chock full of tips for working with millennial clients.

“Though death and debt aren’t typically dinner table conversations, it’s important to understand your financial obligations and how they impact your family,” Ben-Zvi said in a recent interview with Cheat Sheet.

Also, he says, millennials are probably healthy, which could lead to lower premiums. And he’s advocating for planners in the piece, noting that the process is complicated and the choices are many (think term life, whole life, permanent life, etc.)

“You can also go through an agent or a financial planner if you’d like someone to take you through the process,” he advises.

What Can Planners Do?
But if you’re not into the unsexy insurance—or you don’t have the resources for it—then you can partner with an insurance-consultancy firm or work with an objective insurance professional, Finley advises.

Finley notes that advisers should understand the ongoing service that term-life and long-term care policies need and be prepared to be updated with them. She advises to use a CRM system or an Excel spreadsheet to keep tabs of the policies.

“Whether it’s underwriting or explaining insurance jargon, those advisers who use unbiased resources can offload unprofitable work while helping secure the client’s future well-being,” she writes.

HeadshotAna Trujillo
Associate Editor
Journal of Financial Planning
Denver, Colo.

Editor’s Note: For an FPA webinar on how your high-net worth clients may be overpaying to be underinsured, click here. Conducted by Annmarie Camp, senior vice president of national sales and distribution leader of ACE Private Risk Services, and David Spencer, senior vice president of premier client services at ACE Private Risk Services, the webinar offers 1 CFP CE credit.

Also, the August issue of the Journal has more pertinent information on insurance, including life insurance and long-term care insurance. To download the digital edition, click here

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Controlling Expectations and Outcomes

The present economic climate offers heightened insecurity that recalls the traumatic memories from 2008. As far as investing is concerned, clients look to their advisers for precise navigation through these churning waters with the expectation/hope that “the outcomes from this next cycle will be different.”

Defining an Outcome
An outcome is different than a goal. The latter represents a forward view—what we want to happen; whereas an outcome is the result of the planning—what did happen.

Think of the distinction this way. A client goal might be, “I want my wealth secured for the long term,” and the related outcome is, “Your portfolio avoided losses.” While outcomes occur with or without planning, a well-executed plan sets the course for more positive outcomes.

Expectations and Outcomes
The adviser is the primary source for executing the plan, but only one of several sources for setting expectations (see a September 2014 Practice Management Blog post titled “Neutralizing a Client’s Negative External Influences”). A client that expects a 10 percent return because “that’s what my friend’s adviser delivered” only to be disappointed when 8 percent is realized brings to light a failure in managing expectations not execution.

Nonetheless, unmet expectations damage relationships. Therefore, communication strategies form the foundation for setting expectations and defining reasonable outcomes, and this process begins with the plan’s formulation through to each quarterly meeting; it never stops. (Note: fulfilling a client’s service and communication expectations are wholly under an adviser’s control. Take advantage of this control and nail it!)

Any Dollar Lost has the Same Outcome
The current bull market is the third longest in history. The natural cycle means there’s a much higher probability of a market decline than a continued increase. If expectations for the plan’s execution solely rest on performance numbers that go up, there’s a business risk associated with a dissatisfied client base.

Let me state the obvious: a performance decline means the dollar value of the portfolio is reduced; dollars are lost from wealth. This is a simple but vital message to reinforce. Why? Because any dollar lost from wealth—from spending, taxes, fees, depreciation or uninsured risks—has the same effect as a dollar lost to the market.

Here’s the dilemma: so much client anxiety is focused on market downturns that are largely out of an adviser’s control. And, the adviser, knowing this anxiety exists, gets stressed over the possibility that his or her top clients may start looking for another practitioner should investment performances stumble.

Seizing Control of Outcomes
Pounding the fact that any dollar lost has the same wealth outcome as a market decline shifts the plan’s tactical target to programs that minimize the loss of dollars. Given this blog’s space limitation, we’ll focus on two tactics: one for an adviser’s top clients and one for all clients.

  1. Top Clients: Tax Management
    The current tax environment is unfavorable to high-income investors. In some states, the combined tax burden can exceed 50 percent, but even the federal 40 percent marginal tax rate takes substantial dollars from wealth every year. In other words, investors worried about a big market decline every five or six years (U.S Trust says 65 percent of wealthy investors’ priority is to minimize taxes), miss the point that an effective tax management program can minimize the loss of dollars every year. This is called tax alpha and it can be a primary (and controlled) source of outcomes produced by an adviser. Consider variable universal life, variable annuities and trusts in an effective tax management solution.
  2. All Clients: Products with a Disciplined Selling System
    Many studies chronicle the difficulty in actively managed investment products exceeding benchmarks. Whereas most managers tout their stock research and “buying” systems, certain portfolio managers have highly disciplined “selling” systems that do two things to capture value: 1) selling on the upside when a target value is hit; and 2) selling on the downside when value floors are reached.

Losing less than the market also produces excess return. Investment products excelling in the risk statistics “downside capture” and “downside deviation” accurately identify portfolio managers with disciplined selling systems. Here’s the impact: studies show that avoiding losses leads to a better long-term performance profile simply because each dollar NOT lost allows the portfolio to compound from a higher floor.

Comparing Outcomes
In the annual—if not quarterly—review meeting, produce a side-by-side comparison of the plan’s loss minimization program and one without. This will illustrate how the outcome of extra dollars measurably defines a client’s ROI in the advisory relationship.

Kirk LouryKirk Loury
Wealth Planning Consulting Inc.
Princeton J