Retirement Income Technology Leaves Much to Be Desired

By Davis Janowski

Nov. 4, 2007

For the most part, the current crop of software programs aimed at helping financial advisors manage their clients’ assets through retirement fall short of their goals, according to a leading technology analyst.

    The distribution phase of retirement is “an entirely different planning scenario than accumulation,” says Robert J. Ellis, a senior analyst at Celent. “It’s a lot more complex and is underserved by the technologies available.”

    Boston-based Celent is putting together a report that assesses the technological tools aimed at retirement income distribution. The report is expected to be released early next year.

    “This is really a calculus process,” Ellis says. “There are so many moving parts that you can’t look at any single technology in a vacuum.”

    To be sure, post-retirement planning isn’t easy.

    For starters, most clients enter retirement with multiple sources of income, including individual retirement accounts, 401(k) retirement plans and Social Security. In addition, advisors must take into account such variable costs as day-to-day expenses, health care and long-term-care insurance.

    “You have to look at health, longevity, living expenses,” Ellis says. “It really comes down to working on budgeting with the client.”

    Helping retirees prepare a workable budget is something that most advisors find particularly vexing, Ellis says.

    “Advisors are not used to having to say, ‘You shouldn’t buy that car or that house or that $250,000 boat,’” he says.

    At least one advisor admitted to being unimpressed with the retirement income software that is out there.

    “What I’ve run into are programs that are too simplistic around taxes, for instance,” says Marc E. Henn, senior vice president at Cincinnati-based Haberer Registered Investment Advisors, which oversees $800 million in assets.

    “I’ve got an overabundance of complex tax rules to deal with,” he says. “Most of the tools available say, ‘Here’s your average tax rate,’ and that’s it.”

    Another frequent complaint among advisors is that such products are little more than thinly veiled sales tools.

    “We’ve found relying on prepackaged products has the potential to make the user a glorified message boy, having little to no understanding of what they’re talking about,” says Howard S. Haber, a certified financial planner and president of Apollo Wealth Management, a fee-only financial planning and investment management firm in Lansdale, Pennsylvania.

    Software makers face the challenge of avoiding making programs that are overly customized.

    “We do handle a lot of tax rules and withdrawal ordering, but at the same time we must walk that fine line to maintain the regulations at the institutional level that have to be adhered to,” says Lisa Burns, a product manager at Boston-based FundQuest, which unveiled its own retirement income planning tool in August.

    Programs intended to capture information about a client’s health status, or future spending plans, can help advisors chart a course for their clients’ retirement.

    Several products are leading the way in that regard, Ellis says.

    SunGard Data Systems Inc. of Wayne, Pennsylvania, for example, recently launched the Retirement Income Simulation Expert.

    Among other things, the program features a tool that allows advisors to work through the subtleties of asset distribution with their clients, Ellis says.

    Another solution is NorthStar 5.0, the latest version of wealth management software available from NorthStar Systems International of San Francisco. Users license software or gain access through the Internet.

    This system is available through many broker-dealers and custodial companies, including BlackRock of New York, Legg Mason of Baltimore, Merrill Lynch & Co. of New York, Schwab Institutional of San Francisco and Wachovia Securities of Richmond, Virginia. Also, Boston’s Fidelity Investments recently launched the Retirement Income Evaluator to a limited number of its advisors. By year-end, the company expects to make the tool available to its more than 100,000 advisors.

    The tool allows advisors to run client data through Monte Carlo simulations to see how their retirement plan will hold up against their post-retirement income needs. OppenheimerFunds of New York is another company that sees value in providing a retirement-income distribution tool to advisors. The OppenheimerFunds Retirement Income Manager has been available since 2005, but version 2.0 was unveiled just last year.

    So far, about 2,000 advisors have used the tool to create 5,000 plans, says Keith Hylind, a vice president with the retirement income group at Oppenheimer.

    “Our tool really focuses on income needs post-retirement, and it is meant for the advisor to use in actively monitoring where the investor is throughout the distribution phase,” he says. “We envision this being an interactive tool, probably reviewed with the client on an annual basis.”

    Another update, which will include additional inputs for sources of income, is slated for release during the first quarter of 2008.

    This story originally appeared in Investment News, a sister publication of Workforce Management.

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