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10 Huge Planning Themes

What will be the most influential financial planning and money management issues in the years ahead? Here’s our analysis of the themes to watch, study and use in your practice.

By Jeffrey R. Kosnett, Editor, Advisor Today

Financial advisors will never lack for interesting and profound subjects to engage clients and prospects. We asked a selection of financial planners to choose three influential themes in financial planning at the start of the new century. Then we took these findings, thought more about them, and now we nominate the 10 most prominent, or perhaps most newsworthy, themes for planners and advisors.

Talk personal finance with smart and educated clients, or gather at a conference with far-seeing advisors, and you should never exhaust the subjects. If you have five client meetings in a week, expect to treat five different sets of issues. And, as America ages, the demographic wave alone will determine what money problems and challenges the public might pay you handsomely to solve, whether your career is just starting or if you have practiced for 25 years or longer still.

If you’re looking for direction, here’s an essential fact. In October 1999, American Demographics magazine reported that between 1997 and 2002, the number of American families with heads aged 45 to 64 will increase by 5.5 million, to 37 million. By 2008, the number of households “led” by what we used to call middle-aged people will surpass the 25 to 44 group in numbers, 43 million to 40 million.

You’ll still read about the rise of Generation Y and those young adults’ fear and anger about massive public and private pension obligations about to fall on their backs. You’ll also read how 45-and-older boomers—let’s call them the Clinton Cohort—won’t be at all transparent for marketers because boomers will stay healthy longer and cling to their youthful tastes in music, dress, entertainment, travel and recreation, plus a willingness to continue with riskier investments later into life.

In a few words, this rising cluster of 55-year-olds will not buy Buicks and watch network TV as consistently as their parents. Their money will not rest in savings accounts and certificates of deposit. Nor will the Clinton Cohort be able to, or even want to, sell free-and-clear suburban tract houses for outrageous gains so they can build retirement havens in Florida and Arizona. Many of these people will turn 60 and still have kids in high school, never mind finishing up college. The Clinton Cohort will retire—without presidential pensions, of course—but from their jobs, not from all paid pursuits such as freelancing and consulting. When they do finally quit, they will face difficult health and retirement income and longevity and tax issues. Congress has already raised the age for full Social Security retirement benefits to 67, though only for people born in 1960 or later. There’s no reason why the government can’t someday raise this age to 70, although several of the leading presidential candidates this year say they oppose further age increases.

If the age wave seems like a primary driver in our list of 10 huge planning themes for the millennium, it is. But we haven’t overlooked the financial markets. Prosperity and the rising value of securities and prospects for the future certainly affect people’s dispositions and expectations. And those are the issues that tend to fill the time when a financial planner or advisor sits down with a client or a prospect.

1. Asset allocation strategies
Reviewing the 1990s, the 1980s, and most of the 1970s—heck, the whole 20th century—it is hard to dispute the wisdom of keeping a portfolio overwhelmingly weighted in U.S. common stocks. The books closed on 1999 showing that a broadly diversified equity portfolio averaged 5.6 percent annually for the century, versus a 2.2 percent compound rate of inflation. This comparison isn’t skewed to the point of meaninglessness by late 1999’s Nasdaq bubble. In an economy that grows more than it recedes, whether the engines of growth search the Internet or power Model T Fords, equities should win out.

Bonds, it is true, have had their moments, and at times, such as during World War II, savers had other reasons than relative expected returns to choose fixed-income investments. Today, if another world war broke out, and assuming global financial markets weren’t destroyed at the outset, post-millennial defense workers might ignore Liberty Bonds and instead buy stock (or shares of sector mutual funds) in makers of submarines and missiles and military electronic systems. In 1944, though, few wage earners had access to stocks and there was no real mutual fund industry to offer the likes of a Fidelity Select Army-Navy Portfolio. Stock prices actually climbed steadily during World War II, but trading was light and the Depression had drained Americans of both savings and confidence.

Back to the point, the question going forward is whether an overweighting in U.S. equities will be as right for the future as it has been, or if concentrating in stocks of any nationality will become a progressively riskier course for an investor or advisor.

Like so much else, this ties into the age wave. The theory circulates that so many boomers will roll out of IRAs and annuities and mutual funds starting around 2015, that share prices will wither as the sheer volume of liquidity-driven selling overwhelms the buyers. For example, 4.3 million people were born in the United States in 1957, a peak for the cycle. Their normal retirement age for Social Security, as the law stands, will be 66 years and 6 months. In 2023, therefore, figure on a huge burst of retiring. And in 2016, these people will turn 59—and soon free to invade IRAs and annuities without penalty.

Advisors, investors and all kinds of strategists will need to weigh the likelihood of a long, multi-year pattern of stock sales to liquefy cash positions against the reasoning that markets are global and technology lets money move instantly, enabling other investors, mainly foreigners, to snap up what boomers sell and preserve the momentum.

While we wait to see what happens on that score, a more immediate asset allocation issue is what to do about international securities. More and more listed stocks are not native to the United States, while more U.S. companies are essentially worldwide players.

Scores of foreign-based companies are listed now on the New York Stock Exchange and Nasdaq, priced in dollars. The key will be the extent to which foreign markets move countercyclically to the U.S. Right now, this idea is questionable. During short stretches when Wall Street’s indexes plunge a few percentage points, traders in Europe seem to behave just the same. European markets ended 1999 on a high, just as America’s did. When Nasdaq investors took out some profits early in January, world markets also gave back some gains. The world’s traders pay close attention to Federal Reserve policy moves and U.S. economic indicators, two of the most influential elements of American equity direction. An extended correction or worse here, likely set off by uncomfortably sharp or frequent rises in interest rates, would certainly drag down Europe and probably most of Asia.

Smart investing—and counseling—will require patience and a long-term view regardless how many kinds of assets the investor owns or where they are located. Fortunately, there is more information than ever.

2. Baby Boomer inheritances
It’s a blockbuster theme—but don’t fall for the entire story line that most everyone in his or her 40s or 50s whose parents earned at least middle-class incomes stands to inherit big bucks.

Yes, there will be windfalls, and inheritors of this cash (and/or life insurance proceeds) absolutely will need professional planning, tax and investment help. But the giant stock-option fortunes and most of the appreciation in mutual funds and 401(k)s belong to today’s boomers, not their parents.

Moreover, boomers’ elders are not ready to leave soon. Senior citizen life expectancies are rising. Today’s elderly are the first to regard heart surgery as common, to smoke less or not at all, to eat better, and to exercise vigorously in advanced ages. If, as country singer Mary Chapin Carpenter says, 50 is the new 30, 70 must be the new 50.

Then, too, a lot of the elders’ money hasn’t been saved and won’t be saved. More than 1 million divorces a year, many after long marriages, will carve up estates in alimony and in rivalries among second or third spouses and grown children. Americans filed 10 million personal bankruptcies in the 1990s. Small business failures don’t get the attention of successes, but there are millions and they often eat retirement funds or job-buyout lump sums. Add long-term care and other mushrooming medical expenses and the just-be-patient theory of financial planning and rollover selling loses punch.

Still, the World War II generation will pass on, and at some point, Congress may well slash or even eliminate estate taxes, allowing more money to slide through from second spouse to heirs without interruption. This will call for investment planning, tax advice, and discipline. Mom and Dad just happened to write three kids into a will, and you handled their life insurance, so you may have at least three clients—just not three instant tycoons ready to bring you a Gatesian fortune.

3. Client psychology/expectations
Experts on mutual funds and portfolio management worry that the bull market and the nation’s extended prosperity can, or already have, fostered a climate of inflated investor expectations. A PaineWebber and Gallup investor survey, released just after Christmas, reported that investors expect the next 10 years to bring a 19 percent annual gain, an unlikely pace that would mean money doubles every four years. (Want to handicap the re-election prospects of any president who, like a post-millennial Midas, holds the White House while the country literally turns nickels into dimes!)

The consequences are numerous: People avoid or dump perfectly appropriate mutual funds when their performance doesn’t make the very top ranks and instead chase after overheated names. They buy real estate with the intent to flip the property in a year or two at enough of a profit to buy a fancier place. Expensive trucks and sport-utility vehicles are taking over the roads. Car loans and credit card balances go away—in ambitious home-equity refinances. People ignore or castigate important planning elements like life and disability insurance and fixed retirement annuities because the fees may be high or the immediate returns unimpressive.

For advisors with young families as clients—clients who anticipate paying for education and saving for retirement while trying to wedge in a little enjoyment—one responsibility will be to try and manage what these families can and cannot do. The book The Millionaire Next Door by Thomas Stanley and William Danko, continues to sell strongly. The title grabs buyers, but the message is not that the neighbors got rich with little effort while you slept. The message is that living beyond one’s means or basing financial strategies on high expectations is unwise.

Financial discipline is less of a selling tool for a planner than soaring asset growth. It doesn’t always generate fees or commissions. But serious advisors will find counseling or restraining a client to stick to the plan will be an increasingly key role. The teaching side of financial services, clich├ęd as it sounds, will also become more valuable. Think of this: $100,000 sounds like a fortune, and if it’s free-and-clear in your bank account, you will feel rich. You can buy two fine cars, a vacation house in many places, go anywhere you want, or in an extreme case, take off six months or a year.

But apply that $100,000 to the purchase of an income-generating annuity. This is a shock. At age 65, assuming normal health, a man can buy $750 a month of income (life only; it’s less with period-certain guarantees) and a woman, $700. Does $750 make you feel like a squire? This exercise should persuade the possessor of that $100,000 that if it’s inside a qualified plan, that’s not riches—at least not at this time. Eventually, the economy’s winning streak will end and either slow growth, recession, or inflation will squeeze incomes and investment earnings. Not a depression or a meltdown, now, just a squeeze, and that is certainly plausible. Then the astute advisor will be comfortable knowing he or she at least prepared the clients to ride with the punches.

4. Very long life expectancy
People want to retire earlier, but they also expect medical technology and drugs and wellness programs to keep them not just breathing but on the go into advanced ages. Scientists and doctors believe U.S. society will succeed in a way our 19th century forebears would have thought no more possible than for humans to sprout wings and fly. Centenarians will be as common as octogenarians were not long ago. Financial plans must allow for such lifespans.

Data from the Centers for Disease Control and actuarial firms pegs life expectancy for American newborns at an all-time high: 76 years now, gaining a couple of months each year.

Less well understood, but more critical to investors and financial advisors, is the expanding longevity of people who have already reached middle-age or retirement age.

The web site contains a multi-step life expectancy calculator. We completed it in the name of a 65-year-old man, “relaxed and easygoing,” never smoked, average height and weight, OK blood pressure and cholesterol, drinks some alcohol and eats an average diet (no health fanatic, in other words.) He confesses to some family illness at early ages and one grandparent who died prematurely.

Try this one yourself. In our test case, the program replied, “If you continue to maintain healthy habits, you’ll want to plan for a maximum life expectancy of 102 years or more.” That’s right: 102 years.

For financial advisors, the meaning is evident: It takes a bundle of money to pay the bills for a 100-year life—money that will come out of, not feed into, accumulation vehicles. Advisors must learn all they can about income products, including new kinds of hybrid long-duration income-paying instruments and living benefits products insurance companies are sure to invent. Annuities with commutation rights and variable-payout immediate annuities, relatively new concepts, will soar in popularity and become as price-sensitive as term life insurance is now. Lobbyists are already trying to get Congress to cut taxes on money withdrawn from accumulated balances in annuities and qualified retirement plans. Those are just a few of the signs that the national retirement savings priority is shifting from accumulating capital to assuring adequate long-term income.

5. Estate preservation and tax reform
Despite cries for abolition from conservative presidential candidates like George W. Bush and Steve Forbes, and study and paper after study and paper (and not just from ideologues) that say estate and inheritance taxes are unfair to high achievers and more trouble for the government to collect than they are worth, these taxes remain on the books, ready to bite more and more people. Look for the scattered voices trying to get rid of estate taxes to combine and organize and for the movement to gain steam. Anyone who sells life insurance mainly for estate liquidity should expect the political climate about this issue to get more and more intense.

True, whatever happens with taxes, estate planning will not go away. In fact, because of growing national wealth, it will become part of life to a broader constituency. And as it does, the nature of estate planning will surely change, maybe radically. It will be less about tax avoidance and more about fairness and incentives between generations. Demand will explode for planning advice in the creation of trusts and other arrangements that put preconditions on inheritances and offer rising generations personal and monetary rewards for service and achievement.

First, though, the talk will be mainly about tax issues. A middle-of-the-road outcome, regardless of whether Bush, McCain, Gore or Bradley is elected, might be for Congress to raise the threshold of exempted assets. The unified credit, scheduled to reach $1.2 million in 2006, may go to $2 million or higher. That outcome is more probable should Republicans control the presidency and both houses of Congress.

There is, after all, bipartisan openness to tackling estate taxes. Studies such as one by the Joint Economic Committee of Congress, published in December 1998, contend that the very existence of the estate tax has diminished the economic growth in the U.S. by hundreds of billions of dollars. The JEC said, in any event, the marginal estate tax rate is too high, an invitation both to committed tax-cutters and advocates of efficient and fair government to take another look.

6. The global financial services economy
Perhaps this one is murky: Most Americans, not just in insurance or investments, work for companies with overseas interests or at least foreign operations. It often costs less to fly to Paris than to Wichita, while the Internet and e-commerce know no boundaries. There are rich countries and poor ones, booming nations and depressed ones. So what’s the point?

The point is the financial services and insurance industries are especially keen to “globalize.” Any advisor, no matter where he or she works, must know how successful such European organizations as Axa (France), Aegon and ING (Netherlands), Prudential of the UK, and Skandia (Sweden) are with their U.S. insurance and investment operations. These companies, belying the reputation of European businesses as hidebound or strangled by overregulation, have gained U.S. market share in a big way, and by actual growth, not just by acquisition. They are cutting-edge and interested in efficiencies, cost-cutting, growth and innovation.

A recent book, “A Study in Consolidation,” about the big eight European insurers by the Life Office Management Association, (LOMA) talks about how European insurers’ U.S. operations are helping to redefine how an insurance company operates. They have been the most enthusiastic outsourcers of sales and distribution, such as by embracing the bank and stockbroker distribution channels. European-owned insurers are also a force pushing for the adoption of one uniform insurance regulator in the U.S., instead of the patchwork of state departments enforcing laws that are sometimes made at the national level.

7. Long-term care
Agents struggling to sell life insurance—or to convince existing clients they need more of it—sometimes hope to diversify by “going into” long-term care insurance. The demographics are clear (see theme no. 4), and there are and will continue to be new and more effective drugs and therapies available to prolong life and treat chronic diseases. Less clear is the economic angle.

More prosperous sons and daughters will have the money to buy LTC insurance for their parents and themselves. Some members of the middle-class “sandwich” generation of wage earners will go ahead with more modest LTC insurance, but they are stuck between other offsetting demands on their discretionary income.

Because many people also expect death, when it comes, to be quick and painless, LTC insurance will never be a universal choice. One question for advisors, besides whether prospects can afford the coverage, is whether the government will ever extend Medicare-type benefits to long-term custodial care. Up to now, with millions of children and low-income working people lacking basic health insurance, it would seem unlikely for taxpayers to buy LTC insurance for relatively secure elderly Americans. But the AARP is a formidable force, and no legislator dares offend a group destined to get vastly larger and wealthier in the next 20 years.

Another is the ethical question as to whether advisors should promote LTC insurance to people in their 30s and 40s, if they can see those dollars would work more effectively in retirement plans, life insurance policy separate accounts, debt repayment, or as bank reserves. In an American Management Association paper issued last year, Robert Pearson, president of CareQuest, a benefits consulting firm in Neenah, Wis., says unless insurance companies can develop LTC products that &quo;will hold their value for 15-50 years,&quo; something often questionable when a company designs an LTC contract so agents can market the premiums as “affordable,” Americans must understand that LTC plans are not retirement investments.

The real cost of LTC insurance would fall if the government would pick up part of the tab through a tax break. This is possible. Evidence of LTC’s political legs is the fact that both insurance companies and producers succeeded in 1999 in convincing both houses of Congress to expand deductions for LTC insurance premiums. While this fell to a presidential veto because it was part of a doomed Republican-sponsored gigantic tax cut opposed by the Clinton Administration, lawmakers from both parties saw merit in helping people buy LTC protection.

8. Stock market valuation
This isn’t just an issue for traders and portfolio strategists to debate, such as whether Qualcomm shares are or could ever really be worth more than 300 times earnings or, more to the point, whether the overall market can continue to command so high a multiple if the Federal Reserve bumps interest rates a few times in 2000.

Rather, valuation stands to become a huge and democratic (small “d”) planning theme because so many people are exposed in ways unimaginable a generation ago: in contributory pension plans, in variable life insurance policies and annuities, in IRAs, and also in job security. A low or stagnant stock price endangers a company’s independence and can prod its management to fire people or divest operations. Such moves may be smart or may be shortsighted, but they are routine.

Whether stocks continue to ring up gains, and, more importantly, make up a continually larger share of Americans’ financial assets, will be a big issue in the years ahead.

Right now, to take one indicator, the proportion of variable annuity assets held in fixed accounts is half what it was five years ago: 21 percent now, compared with 39 percent in 1994. In absolute dollar terms, this represents an extra $200 billion-plus now exposed to the stock market that wouldn’t have been had investors and advisors allocated assets the same as before.

Variable life separate accounts have also exploded in the same fashion. Some 85 percent of variable life assets are in equity or balanced accounts, including a bunch of S&P 500 index funds and some of the same outside-managed growth accounts so popular in deferred annuities. Many of these variable product investments are subject to steep surrender charges and backend loads, so policyholders may feel trapped if stocks go into a prolonged and unrestrained tailspin. And then, as some influential insurance and investment officials and regulators have said before countless public forums, some presently happy clients will turn on agents, brokers, advisors, insurers and financial planners even if these same investors tuned out their advisors when they started to warn that telecommunications shares will not rise 2 percent every day and, no, few individuals can consistently buck the tide.

9. Trends in pension benefits
Any financial plan includes an assessment of expected cash retirement benefits. The key pension question for the Clinton Cohort will be how reliable are the defined-contribution and other new-generation retirement schemes so prevalent in today’s workplace. Will these plans provide as much security as the past generation of defined-benefit pensions? DC plans and supplemental voluntary accumulation schemes may be more vulnerable to an outbreak of high inflation because that would depress the value of the stocks and bonds whose performance determines the amount of retirement annuity dollars such pensions can generate.

Also, unlike pensions where benefit formulas are tied to salaries—which often rise accordingly in inflationary times—new-style plans are tied to the company’s and the beneficiary’s willingness or ability to contribute. So, even if you keep your job during a recession, you may not be able to feed your retirement plan as well—and neither will the boss.

Actuaries and benefits experts are known for making predictions and writing about what to look for. So, skipping the arguments about vesting schedules and whether employers will even want to continue to underwrite retirement income, planners and savers will see or want to track such developments as:

  • More lump-sum cashouts. According to the U.S. Department of Labor, the proportion of pension plan beneficiaries entitled to remove their entire benefit in a lump just about doubled in the 1990s. Personal control of retirement assets is a hot button with investors of all stripes, but especially with financially-aware (or overconfident) boomers, who may think they can handle the money better than the employer or pension trustee. There will be political pressure on the government to enable even more defined-benefit plan members to take lumps—which means opportunities to advise people on how to manage the money and spread out the tax hit.

  • Liberalized early access. In the same vein, there’s a trend that will continue towards allowing loans or taxable withdrawals for reasons other than demonstrated hardships. Planners will need to work closely with investors on questions such as whether it is a good idea to take out appreciated retirement assets to buy a large new house, or whether IRA and 401(k) money will thus take the place of other savings for education.

  • Social Security reforms. The press and politicians beat this to death, but something WILL happen—reduced benefits, higher taxes, more risk—take your pick. Savers and households with lots of other assets and pre-funded benefits may not care as much as members of previous generations or less-affluent households, but think of it this way: even if you or your clients have $1 million in annuities or retirement funds, what’s wrong with a $1,500-a-month SS check? That will at least take care of utility bills, life insurance premiums, some medical expenses, or whatever. So don’t scoff at Social Security or fall into the trap that it is of no consequence.

The question is whether it will be a major supplemental income benefit or a minor one.

10. Technology and the volume of information

Finally, and this is also somewhat murky, none of us can guess what further progress in technology will mean to the management of finances, to the speed of financial decision-making, and to our capabilities to construct ever-more-accurate financial models. Leaving the science to the scientists, and the computer architecture to the engineers, all of us can still be confident that the curves are still climbing, that computing speed will get faster, that artificial intelligence will get smarter, and more.

The trick to making technology work for a financial services practice is to use it as a tool and as a way to build on the personal involvement and timely counseling you can offer. In this way, you will absolutely have a place in the business world well into the new century.


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