Mining the Retirement Income Market


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New consumer needs, a large potential market and the absence of an established market leader make the retirement income market a potentially exciting opportunity.

This paper, authored by Ann Connolly, director, Deloitte Consulting LLP, examines the size and characteristics of the retirement income market, highlights innovation opportunities, assesses the competitive landscape, and lays out action steps that financial services companies across sectors – banks, insurance companies, mutual fund companies, and brokerage firms/investment managers – should consider taking to position themselves for leadership in the market.

The report describes:

The boomer retirement market, and why it’s different than preceding generations
Areas targeted for innovation:
*Product, Advice, Sales, and Service
*Opportunity/advantage/challenge assessment for banks, insurers, mutual funds and brokerage/investment managers
*Ten point action plan for adapting current operating models for future success

Published in: Business, Economy & Finance
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Mining the Retirement Income Market

  1. 1. Mining the retirement income market Financial Services
  2. 2. Contents i Foreword 1 Introduction 2 Future growth opportunity: the emerging retirement income market 6 A need for innovation 7 Product 8 Advice 9 Sales 11 Service and customer experience 13 Financial services companies: positioning and challenges 16 Take action to win
  3. 3. Foreword Dear Colleague: The baby boom generation, which has shaped societal mores and economics for decades, is reaching retirement as we experience the most profound financial crisis since the Great Depression. As a result, a disproportionately large segment of the population is at or near retirement at a time when the asset value of their holdings has significantly declined. This convergence has highlighted the extent to which boomers are vulnerable to income risks in retirement and made clear the need for innovative market offerings to provide more secure retirement incomes. The drop in asset values has shaken consumer confidence across the board and precipitated fundamental restructuring of the financial services industry. Leaders in every sector have been humbled. However, for those who are strong enough to survive, industry restructuring provides a rare opportunity to build capabilities strategically that may help fuel future growth. Because of the size of the baby boomer segment and the value of the assets they control, the retirement income market represents a potentially powerful growth engine for financial services companies seeking to rebuild reputations and consumer relationships that have been damaged by the financial crisis. A burst of innovation is likely as the economy recovers and financial services companies refocus on the long-term growth opportunity of the retirement income market. Innovation in the retirement income market will likely focus on the unique needs and challenges presented by baby boomers. This generation’s needs are different from those of their parents’ generation – both because boomers are expected to spend much longer in retirement and because many may have to rely more on their personal investments, rather than on defined benefit plans and Social Security. Baby boomers will need to convert their savings into a reliable stream of income and to protect their income against the uncertainties of retirement. It is anticipated that mass-affluent boomers likely will present the greatest opportunity – and the greatest challenge – in the retirement income market for financial services providers: Serving this market profitably may require fresh ideas and new ways of doing business. In this report, we examine the size and characteristics of the retirement income market, highlight innovation opportunities, assess the competitive landscape, and lay out action steps that financial services companies should consider taking to position themselves for leadership in this market. We hope you find this report valuable and encourage you to contact us with questions or for further discussion. Best regards, Jim Reichbach Vice Chairman U.S. Financial Services Leader Deloitte LLP Mining the retirement income market i
  4. 4. Introduction The financial market crisis that began in 2008 has These changes will likely occur within the context of devastated many individuals’ savings and undermined a dramatically restructured financial services industry. consumer confidence in our financial institutions. Giants in every sector have failed, been dismantled, or Significantly affected are those at or near retirement who acquired. Disruptive though it may be, such industry counted on the value of their 401(k) plans, IRAs, home restructuring may provide stronger players a once in a equity, and other personal savings to pay for their basic lifetime opportunity to rebuild strategically their capabilities living expenses in retirement. The decline in value across and focus on the growth engines of the future. The field is all asset categories has made this generation of retirees’ wide open for those financial services companies capable vulnerability to risks clearly evident. of rebuilding confidence by delivering real value in the retirement income market. 2008 was also the year that the leading edge of the baby boom reached retirement. Since the 1960’s, the needs and The following discussion focuses on what financial services preferences of this oversized generation have significantly companies will likely need to do to translate the emerging influenced marketplace demand. Their need for new and retirement income market into a future growth engine, by: innovative products and services that provide greater • Providing insight into the special retirement needs of security for retirement income is likely to be a major growth the baby boom generation and how these vary by opportunity for those financial services companies that not market segment only survive the current crisis, but have the creativity and • Highlighting ways in which financial services companies capabilities necessary to respond. can innovate their offerings to achieve market leadership • Assessing the competitive landscape and the A series of new retirement income solutions is likely to organizational challenges of marshalling required emerge as the economy recovers and financial services capabilities effectively companies refocus on long-term growth opportunities. • Outlining the key action steps that financial services Innovation may be more substantive and profound than companies should consider taking to position themselves any that has occurred to date, and will likely influence all to win in this market. aspects of market offerings – product, advice, sales, and service features and delivery. For those who choose to compete, the ability to commit resources and a willingness to innovate and adapt will be essential for success. Mining the retirement income market 1
  5. 5. Future growth opportunity: the emerging retirement income market New retirement needs of the baby boom generation However, retirement will present baby boomers with many As the financial crisis has shown, severe capital market additional financial challenges. In retirement, their focus fluctuations do occur and can quickly erode individuals’ will likely shift to addressing the complex financial issues retirement savings. Boomers’ vulnerability to retirement associated with converting accumulated assets into a income risks is greater than that of their parents’ stream of income that will be sufficient for the rest of their generation – both because boomers are expected to spend lives. This income will need protection from multiple risks, much longer in retirement and because many may have including investment risk, inflation, rising health care costs, to rely more on their personal investments, rather than and longevity. defined benefit plans and Social Security. The leading edge of the baby boom generation is now Boomers who are still working are primarily concerned with beginning to retire, moving from the asset accumulation maximizing the size of their asset base for the future. phase to the asset payout phase. As a result, they likely will need a broad spectrum of products and assistance that span the breadth of financial services, including: • Planning (e.g., financial, tax, risk, estate) “Because of the size of the baby boomer • • Risk assessment Asset management segment and the value of the assets they • • Insurance (e.g., longevity) Asset monetization (e.g., reverse mortgages) control, there is a tremendous market and • Transaction processing and management revenue opportunity for financial services • • Long-term care financing Health care financing providers that can successfully address Because of the size of the baby boomer segment and the these emerging needs.” value of the assets they control, there is a tremendous market and revenue opportunity for financial services providers that can successfully address these emerging needs. 2
  6. 6. Baby boomer assets and market segmentation As shown in Exhibit 1, the mass-affluent ($100k to $1M) In 2007, the most recent year for which household financial own 52 percent of total baby boomer retirement payout data are available, baby boomers had $14.0 trillion in assets, and this figure rises to 76 percent when the core investable financial assets1. But Deloitte estimates that affluent ($1M to $3M) are included. These households only 62 percent of this sum consists of “payout assets,” i.e. have significant assets to convert to income for retirement. assets that will be transformed or invested to produce a Individuals in the mass and core affluent segments stream of income to support planned expenditures during comprise the most significant potential market for retirement. The remaining investable assets will be saved assistance with retirement issues, including: and transferred to the next generation. • Assessing how much income they will need to maintain their living standard Ultra high net worth individuals (those with greater than • Timing asset drawdowns to match financial needs that $5M in investable assets) may not need to convert a large can change over time portion of their assets into income because investment • Balancing income protection and growth objectives returns likely will provide sufficient income during • Insuring against capital market and longevity risks retirement. (Indeed, total investable assets for this segment • Absorbing shocks, such as a debilitating illness or the historically have continued to grow, rather than decline, death of a spouse during retirement.) Most other boomers, however, are • Monetizing home equity likely to use a significant portion of their investable assets • Contending with ever-rising health care costs and may also monetize some non-financial assets, such as • Addressing estate and tax issues homes, to meet their retirement income needs. Exhibit 1. Retirement income market size and segmentation Exhibit 1: Retirement income market size and segmentation Assets used for retirement income and assets not Retirement payout assets used for retirement income (households aged 45-64) (households aged 45-64) 2,500 $1,450 B 2089 2,000 1926 $2,089 B Payout assets ($ B) 1518 1,500 Assets not Payout assets used for used for 1156 retirement retirement 1,000 804 $5,270 B $8,773 B 646 $4,600 B 634 500 0 <100 100- 250- 500- 1,000- 3,000- 5,000 Total investable 249 499 999 2,999 4,999 financial assets = $14,043 B $634 B Mass Mass affluent Core High Ultra affluent net high net High/ultra high net worth 17% Mass affluent 52% worth worth Core affluent 24% Mass market 7% Investable asset segment ($000) Source: Federal Reserve Board, Survey of Consumer Finances, 2007, and Deloitte analysis 1 Investable financial assets, as defined in the Survey of Consumer Finances, include the following: transaction accounts, certificates of deposit, savings bonds, other bonds, publicly traded stocks, pooled investment funds (excluding money market funds), retirement accounts, and cash value life insurance, other managed assets and other financial assets. Source: Federal Reserve Board, Survey of Consumer Finances, 2007. As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Mining the retirement income market 3
  7. 7. Attitudes on retirement: Deloitte’s findings Two key findings of the study are: Deloitte’s research shows that segmenting the retirement • While we found that High Asset consumers were more income market based primarily on economic criteria likely to be comfortable about retirement than Low is useful in sizing the aggregate market opportunity. Asset consumers (68 percent versus 41 percent), many However, this approach fails to provide financial services consumers in both asset classes were worried about companies with the deeper consumer insight necessary retirement. More often than not, the level of retirement to develop and market innovative solutions. A study preparedness was found to be a stronger indicator of commissioned by Deloitte2 examined the concerns and consumer attitudes and behavior than relative asset level. attitudes of retirees and near-retirees in two groups: Low Asset, individuals with less than $250,000 in investable • Those in the study who were comfortable share similar assets, and High Asset, those with investable assets of attitudes, regardless of asset class, and these attitudes $250,000 or more. (See Exhibit 2.) differ distinctly from those who were not comfortable. Regardless of assets, for example, respondents who were comfortable were more than twice as likely as those who were not comfortable to be satisfied with the information on retirement products and services they received. Exhibit 2. Retiree and near retiree attitudes about retirement, by asset class and comfort level Comfortable Not comfortable Higher Lower Higher Lower Respondent perceptions/behavior asset asset asset asset Most critical financial objective is “ensuring adequate income during retirement” 52% 48% 74% 73% Biggest threat to financial future after retirement is “significant health problem” 32% 31% 26% 34% Satisfied with financial game plan (top 2 on a scale of 1 to 7) 60% 52% 16% 10% Usefulness of information sources (top 2 on a scale of 1 to 7): face to face 49% 42% 48% 42% Always prefer doing research on financial items myself (top 2 on a scale of 1 to 7) 33% 35% 24% 27% Very confused about alternative financial products and services (top 2 on a scale of 1 to 7) 5% 9% 19% 21% Satisfied with information received about retirement products, services, and investment options 46% 38% 20% 15% (top 2 on a scale of 1 to 7) Satisfied with financial advisor and assistance received with retirement planning 66% 61% 43% 44% (top 2 on a scale of 1 to 7, for those who have a financial advisor) Have established a retirement budget 63% 67% 39% 34% Have calculated how much in total retirement savings, pensions, and social security is needed to 76% 69% 60% 45% cover expected retirement expenses Have identified whether any gaps exist(ed) between what is needed in retirement and what 69% 64% 44% 40% is available Source: Deloitte research commissioned through The Diversified Services Group, Inc., “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August 2006 2 Deloitte research commissioned through The Diversified Services Group. Inc., “Consumer Attitudes and Perceptions about Retirement Income,” July, 2006; and “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006. 4
  8. 8. Analysis of the data demonstrates that the comfort level The retirement income market challenge of individuals regarding their preparedness for retirement One of the most important implications for financial is a key determinant of how they will react to product services companies is that the retirement income market, offerings, financial advice, marketing messages, and, though large and potentially attractive, is notably different in general, of the kind of help they will want regarding from the asset accumulation market they are accustomed retirement income solutions. A lack of comfort is correlated to serving. Important issues and distinctions include: with lower levels of satisfaction with products/solutions • The basic difference between key customer objectives: and advisors, implying that the Not Comfortable segment maximizing return on assets versus maximizing a reliable is motivated for change. While the greatest opportunities lifetime income appear to reside in the Not Comfortable segment, there • The financial significance of the mass-affluent market. are sub-segments within the Comfortable categories where Mass-affluent market boomers are not merely a large opportunities can be found. share of households; they represent the majority of the assets that will be converted to retirement income Companies that want to carve out their share of this market • The importance of understanding end-consumer might make a more immediate and effective impact if they: attitudes and behaviors when developing innovative • Pay close attention to the more highly motivated rather than incremental solutions for this new market segments • Serve them with messages, products, and advice that fit Financial services providers that want to realize the their particular needs potential of the retirement income market must consider • Do this in a way that closely reflects consumers’ own carefully the major degree of change and investment that perceptions and attitudes may be required in order to compete successfully. Doing this, however, requires digging beneath the economic aggregates and developing original insight into consumer needs, perceptions, and attitudes regarding retirement income solutions. Companies that focus on “One of the most important implications understanding the wide range of differing end-consumer for financial services companies is that needs and behaviors will be better positioned to serve their clients by truly meeting their needs and ultimately building the retirement income market, though the foundation for substantial growth in the retirement income market.3 large and potentially attractive, is notably different from the asset accumulation market they are accustomed to serving.” 3 Deloitte research commissioned through The Diversified Services Group Inc., “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006. Mining the retirement income market 5
  9. 9. A need for innovation Current state: incremental market innovation Insurers have emphasized their ability to provide insurance The marketplace has already seen several new product against non-diversifiable risks; they have introduced riders introductions targeted to the emerging needs of the to annuities that dramatically increase investor liquidity, retirement income market. Mutual fund companies investment control, and value at death. The advantages have begun to market retirement income funds – “self- include: annuitized” solutions intended, but not guaranteed, to • Living benefit riders that allow consumers access to their provide a stream of income for a period of years. annuities’ cash value in special circumstances, such as a Examples include: catastrophic health event or the need for long-term care; • FMR LLC’s (“Fidelity Investments”) Income Replacement • Guaranteed minimum withdrawal benefits that give Funds, which are designed to provide withdrawals from investors the ability to withdraw funds at a specified savings over a set time period, after which all investment annual rate that is guaranteed not to decline. gains and principal will be exhausted; Such enhancements helped stimulate growth in assets • The Vanguard Group Inc.’s Managed Payout Funds, under management for insurers. But individual annuities which are intended to provide a monthly distribution are estimated to represent only 6% of total investable while preserving principal over the long term; and financial assets.4 • Charles Schwab & Co., Inc.’s Retirement Income Fund, Clearly, greater innovation will be required to capture which provides monthly income by paying dividends on substantial market share in the retirement income market. a monthly rather than a quarterly basis. Significant consumer needs remain unanswered, and no financial services company has yet figured out how to None of these offerings, however, provide protection profitably serve the mass-affluent market. against risks, such as longevity risk or capital market shocks, that cannot be fully diversified through asset management. Future state: a burst of innovation As financial services companies recover from the immediate crisis and focus on future growth, there will likely be a burst of innovation in the retirement income market. As a result, change may be significantly more substantive than any seen in this arena to date: It will likely be profound, not incremental, across multiple dimensions of the business, including product, advice, sales, and service. “Significant consumer needs remain unanswered, and no financial services company has yet figured out how to profitably serve the mass-affluent market.” 4 Deloitte analysis of data from Federal Reserve Board, Survey of Consumer Finances, 2007, and LIMRA International, The 2007 Individual Annuity Market. 6
  10. 10. Product One effect of the financial crisis has been to elevate Not all insurers are willing to provide an unbundled GMWB consumers’ risk consciousness, particularly heightening for reasons related both to complexity of execution and their aversion to capital market risk. Consumers’ immediate strategic positioning. Increasingly, however, we expect response has been to demand more insured investments to see other types of risk protection unbundled from the (e.g., FDIC insured accounts, fixed annuities) and to shun management of retirement assets, permitting customers equities. Insurers, other than the federal government, have to purchase some insurance without having to relinquish struggled with the cost of hedging in such volatile markets, ownership and control of their assets. For example, Deloitte and many are raising prices and/or redesigning benefit has a patent pending on a product, Life Options, which guarantees. Eventually, we expect to see new products would allow consumers to purchase insurance against emerge to mitigate investment risks and to address the capital market downturns and longevity risk (Exhibit 3). challenges of other risks to retirement income, such as Products like Life Options should be easier to administer longevity, long-term care, and health care costs. As product than an unbundled GMWB and may be strategically more innovation intensifies, we expect to see greater development attractive to some insurers. of unbundled products that can be sold a la carte or assembled into packages to meet specific customer risk Unbundled products may be used as components of preferences. broader retirement solutions that will be assembled by retirees, financial advisors, or product manufacturers. Most often, insurance against many retirement-specific risks Whether bundled or unbundled, the next generation of has been bundled with asset management services in the products will likely be packaged and marketed as simpler form of riders to annuity products. Only recently have we and easier to understand, and be available for sale via less begun to see attempts to unbundle annuity products. expensive distribution channels. Some insurers have begun offering a guaranteed minimum Strategic relationships across financial services sectors, such withdrawal benefit (“GMWB”) that is separate from their as insurance and asset management, will likely continue to annuity products. This product provides consumers with increase as competitors explore and invest in new product the guarantee of a future minimum income stream when development that incorporates attributes beyond their own they invest in the selected funds of asset managers who competencies or capabilities. have contracted with the insurer. Exhibit 3. Unbundled products Life Options* Life Options* Unbundled GMWB Unbundled GMWB This product separates asset management from longevity This product unbundles a guarantee for lifetime minimum and capital market risk protection, thereby allowing withdrawals from the underlying variable annuity and allows customers to buy insurance without relinquishing control it to be provided on mutual funds, managed accounts, and of their assets. other investment vehicles. • Life Options provides an income benefit in any year that the • This product provides an income benefit starting at a certain age principal and accumulated returns of a market index that reflects subject to certain restrictions (e.g., generally require asset allocation the asset allocation selected by the investor are inadequate to fund choices, withdrawal each year is subject to a maximum) for life. provide the investor’s planned spending level. • Positive investment experience can be locked in once a year on the • Life Options provides an income benefit if the client survives to the contract anniversary so the guaranteed minimum amount of income terminal retirement age and market returns have not exceeded the can go up but never down. assumed investment returns. An income stream is provided for the remainder of the individual’s lifetime. • At least two insurance companies are working with asset management companies to launch this guarantee on certain • The cost of Life Options would be approximately 10% of managed accounts. the initial outlay for an annuity. * Patent pending, Deloitte Mining the retirement income market 7
  11. 11. Advice Pre-retirees and retirees alike need advice, education, Financial services companies, including Massachusetts and solutions as they look to balance the financial and Mutual Life Insurance Company and Fidelity Investments, emotional aspects of a major life transition. And, they are are beginning to create retirement management looking to their advisors for help in devising strategies accounts that consolidate retirement income sources and that provide control of their retirement futures in these expenditure outflows in order to simplify and improve asset uncertain times. Consequently, the role of the advisor/ and liability management. The evolution of consolidated financial planner is shifting from selling products to accounts is expected to make it easier for retirees and consulting on life goals. The Ameriprise Financial, Inc. their advisors to monitor investment performance and “Dream Book,” a guide that helps individuals articulate planned versus actual spending, as well as to make timely their retirement dreams and goals, is an example of this adjustments to maintain needed income levels. approach. Given the potentially significant changes in the role of Given that the average baby boomer may spend 25 to advisors and the development of new and restructured 30 years in retirement, planning will become more of an products designed for asset drawdown rather than asset ongoing educational process than a point-in-time event. growth, advisor compensation models will need to evolve The advisor will likely focus on assembling solutions to as well. The result of these changes will likely be better meet a broad array of needs, then adapt these solutions alignment of advisor incentives with consumer objectives. as client needs evolve through the various phases of We have already seen the growth of fee-for-service models retirement. for high-end consumers, such as those by The Ayco Company, L.P. In the middle market, Citigroup Inc.’s “myFi” As products are unbundled, advice becomes more critical advisors are salaried and deliver financial advice primarily to formulating the most cost-effective solution for a via call centers in exchange for a monthly fee. particular client. At the same time, advisors may be faced with what could become a daunting a la carte menu from Although there may be considerable resistance to which to select. Practical considerations, quality assurance, compensation changes among established advisors, the and compliance are likely to foster development of advice conditions are ripe for new players to shift from asset- “modules” to help advisors craft solutions efficiently while based fees and commissions to a system that encourages ensuring that solutions suit the needs of each client. For maximizing a reliable income stream during the retirement example, modularized advice is being linked to specific payout phase while customer assets are being drawn investment solutions as a means of serving less affluent down. This approach is expected to be supported by the customers economically. emergence of new and innovative sales channels. Today, advice and financial management tend to be fragmented, but new solutions are being developed to provide greater integration. For instance, there are new “Given that the average baby boomer financial modeling tools designed to help advisors and their clients assess tradeoffs among different categories of may spend 25 to 30 years in retirement, risk under a range of possible scenarios. These products planning will become more of an ongoing work by providing risk-adjusted solutions that incorporate insurance and investment options balanced across these educational process than a point-in-time product categories. event.” 8
  12. 12. Sales The restructuring of the financial services industry is forcing • Provisions of the Pension Protection Act of 2006 a consolidation of retail distribution and a reduction in the encourage plan sponsors to assume more proactive number of investment brokers and financial advisors. Face- roles than in the past. to-face selling will most likely continue to be the dominant means of distributing financial services and advice to baby Deloitte also anticipates an expanded role for non-traditional boomers. Other channels, however, will likely increase in retail channels. Just as we have seen in other maturing importance – especially those that serve the mass-affluent industries, retail selling may evolve from a few dominant segment. models to a wide range of options. The challenge, across all channels, is to enable consumers Many of these new options are expected to be oriented to obtain retirement income advice and products more toward the needs, preferences, and economics of the easily and affordably. To date, the economics of asset- mass-affluent market. Mass-affluent consumers are less likely based fees and commissions have tended to make serving to have a financial advisor,6 and recent research suggests low asset customers less than attractive. Although some that although they still prefer face to face buying, they may companies have prospered serving low asset consumers, be receptive to non-traditional approaches.7 Therefore, more financial services companies have tended to focus on alternative marketing channels will likely become more affluent and high net worth customers. But because mass- important, including: affluent consumers own the majority of retirement payout assets, we will likely see innovation in sales channels and • Part time and/or niche-oriented sales forces compensation models that will make selling to this segment • Hourly fee-for-service planners and advisors more profitable. Notable examples include expanded use of • Social networking, both online and community-based the employer group channel, development of non-traditional • Affinity groups retail distribution outlets, and increased cross-channel • Use of direct channels, especially call centers and combinations. the Web. Changes in attitudes among pre-retirees, plan sponsors, defined contribution investment managers, and public regulators favor expanded use of employer plans to “Because mass-affluent distribute products and advice after retirement. Consider the following: consumers own the • Sixty percent of lower-asset consumers believe that their majority of retirement employer has an obligation to provide retirement planning assistance, and 40 percent believe that this obligation payout assets, we will extends to their post-retirement years.5 likely see innovation • Similarly, the asset managers of defined contribution in sales channels and plans have a strong incentive to prevent plan participants from entering the retail market through vehicles, such as compensation models that graduated purchase annuities and guaranteed minimum withdrawal benefits. will make selling to this segment more profitable.” 5 Deloitte research commissioned through Diversified Services Group, Inc. “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006. 6 Deloitte research commissioned through Diversified Services Group Inc., “Consumer Attitudes & Perceptions About Retirement Income” July, 2006; and “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006. 7 Peter Tufano and Daniel Schneider, “Using Financial Innovation to Support Savers: From Coercion to Excitement,” HBS Working Paper, April 2008. Mining the retirement income market 9
  13. 13. In addition to an increase in the number of sales channels, need to be switched to a live investment advisor to select the retirement income market, like the broader financial and purchase an appropriate product, without obliging services market, will likely see an evolving array of the customer to start all over with the next contact in their approaches that reflect different combinations of channels overall customer experience. (direct and face to face), media (Internet and telephone), and location (home and store). Exhibit 4 illustrates potential Financial services players will likely have to decide how elements of a multi-channel sales strategy. much to invest and how to allocate resources across multiple distribution channels. Managing this broader The reality is that companies will have to master the ability spectrum of options in order to create a positive and to switch clients smoothly from one channel to another competitively advantaged customer experience will be a during a single encounter. A consumer, for example, who major challenge. accesses a customer service center to make an inquiry, may Exhibit 4. Elements of a multi-channel sales strategy Strengthen focus • Develop goal-based customer dialogues of Internet presence on retirement • Launch target-segment-focused destination experiences • Re-engineer process to eliminate problems commonly experienced by retirees Enhance call center customer/producer • Enhance service to sales reps and retirement advisors by providing experience multiple levels of relationship management support and service • Employ predictive modeling to present real time service/sales options starting with high value customers/producers Drive growth in • Improve services and support for advice-oriented financial planners retirement through Deepen institutional and retirement face-to-face representatives customer-focused, distribution • Brand/differentiate financial planning and retirement multi-channel, partnerships solution tools engagement strategies • Distribute innovative products and solutions as packaged bundles Expand/increase • Launch non-traditional talent acquisition and development efficiency of own programs sales force: • Make selective ongoing distribution acquisitions - Employer plans - Institutions • Develop a common retirement sales process and integrated - Individuals support platform Utilize advisors • Expand growth-segment-targeted products/distribution as branded (Emerging affluent, Hispanic, Asian) face to face • Expand general retirement/advisory site links/relationships/ retirement channel/ distribution access advisor platform of choice • Expand incremental cross-distribution relationships Source: Deloitte analysis, 2008 10
  14. 14. Service and the customer experience Consumer confidence in our financial services institutions has Building brand differentiation through customer experience been severely shaken. Financial services companies are under requires keen insight regarding consumers – to define the pressure to differentiate themselves as sources of superior nature of the experience, to understand the key aspects of value and to again earn their customers’ confidence. New the experience that can be differentiated, and to translate products, new customer segments, and the need to manage this intelligence into “moments of truth” that can be costs will only intensify the impact of these trends in the managed during the service interaction. retirement income market. Advanced analytics will be critical to developing this insight A dependence on new product offerings and pricing and to designing and managing the overall customer strategies as the sole means of differentiation is likely no experience. Advanced segmentation and predictive longer enough; the ability of competitors to mimic easily modeling can transform the ability of companies to group new product features has undermined efforts to differentiate customers into meaningful segments that buy differently, on these grounds alone. In the retirement income market, prefer different product offerings, and seek different customer service can be an important differentiator as service experiences. Financial services companies seeking competitors seek to rebuild consumer confidence and to differentiate themselves may increasingly use these establish their credentials as stewards of assets and sources tools to align new products, distribution, and customer of advice and services, specifically for this market. service operations to the needs of specific segments of the retirement income market. Providing a good customer service experience is no small challenge: The performance of financial services companies At call centers, predictive modeling systems are being used in delivering a consistent customer service experience, increasingly to integrate real-time information (interactive much less experiences that are differentiated by customer voice responses and initial requests from the caller) to form segment, has been mixed. Many have struggled to balance an offer from the advisor handling the call with a likely costs against the apparent demand of their customers for an higher probability of being accepted by the customer. At the increasingly diverse mix of service options. same time, Internet protocol-based systems are enabling the virtualization of call centers, liberating call centers from the Recent market trends toward independent financial advice physical constraints of geography by integrating all members tend to reduce product manufacturers’ direct control of customer support units into a single team, regardless over the customer experience at the point of sale. Even of location. This development can be used to help contain companies with proprietary sales forces often limit face- expenses, for example, through the use of cost-efficient to-face customer service for routine transactions. As a home or mobile service representatives. result, the customer service contact/call center is a principal interaction point where many financial services companies Many financial services companies have been slower in can deliver a distinctive customer experience. adopting these service capabilities than organizations in other industries. This scenario opens the door for a disruptive play by a technology-savvy new player. “In the retirement income market, To deliver a competitively advantaged customer experience, customer service can be an important many financial services companies will likely need to significantly upgrade their call center capabilities. Given the differentiator as competitors seek to pace at which the technology is advancing and the degree of catch up required, some financial services companies rebuild consumer confidence and establish have turned to outsourcing as a means of accelerating their their credentials as stewards of assets and access to the rapidly evolving technology that is crucial to supporting highly differentiated customer service delivery. sources of advice and services specifically Whether insourced or outsourced, significant investment, complex choices, and continuous technology upgrades may for this market.” all be a part of meeting the customer service challenges of the retirement income market. Mining the retirement income market 11
  15. 15. “The nature of the retirement income market calls for financial services companies to cross traditional boundaries – within their organizations and across industry sectors – in order to meet the challenges of this market and succeed.”
  16. 16. Financial services companies: positioning and challenges The pace and nature of innovation, coupled with the need • Other companies are redrawing their organization charts to serve mass-affluent customers more effectively and to bring related retirement products into the same profit profitably, are expected to have major implications for center. Companies with large defined contribution plan financial services companies that decide to compete in the businesses, for example, may consolidate IRAs and/or retirement income market. The nature of the retirement retail annuities into a single retirement business line to income market calls for financial services companies to facilitate rollovers from employer plans to retail accounts. cross traditional boundaries – within their organizations A risk of this approach is that it may complicate the and across industry sectors – in order to meet the task of managing retail channels that are used both for challenges of this market and succeed. retirement products (such as annuities) and other retail financial services (e.g., life insurance). In-depth organizational change Financial services companies positioning themselves How well either of these structural approaches works will for the retirement income market are struggling with depend on the commitment of leadership, the talent of important organizational issues. Most companies that managers and employees, and the processes that enable strive to become more customer-centric find that their them to succeed. existing operating models, oriented to support products and services, create silos that undermine a consistent, Competing across the financial services sectors company-wide approach to serving customers. The retirement income market opportunity cuts a clear path across traditional financial services sector boundaries. The problem is particularly acute in the retirement income Banks, insurance carriers, mutual fund companies, and market. The transition to retirement typically involves the brokerage/investment managers all have established movement of assets from an employer group/institutional positions managing assets and providing administrative plan to a retail IRA, annuity, or other savings product. services both for retail retirement accounts and defined Moreover, retirees require a wide range of advisory, asset contribution plans. All are at risk that the retirement of the management, insurance, and transactional services that often baby boom generation will disrupt their existing retirement reside in discrete product organizations across a company. businesses as retirees move assets out of their current retirement accounts and into new, income-generating Financial services providers are taking several approaches to products. And companies in every sector hope to capture bridging the silos. For example: a disproportionate share of this “money in motion” and establish an even more robust position in the retirement • Some companies are creating the role of “retirement income market. czar,” an individual who is charged with identifying opportunities and issues, and making the case for Traditional sector boundaries are being redefined by innovation within the individual business units. Much industry restructuring. Already we can observe some like a brand manager in a consumer products company, shifting among the sectors of capabilities that are these executives use persuasion and influence to marshal important in the retirement income market. Because resources and gain support for retirement-oriented industry restructuring is fundamental and ongoing, the initiatives. A risk of this approach is that the business full impact may not be understood for some time. In units often don’t move beyond discussion to strong light of these uncertainties, we have chosen to assess the commitment and major investment. retirement income market strengths and weaknesses of each sector as traditionally defined. Although the specifics will vary from company to company, the sector competitive profiles suggest the breadth of capabilities that will be required and potential opportunities for cross-sector investments, partnerships or other types of relationships. Mining the retirement income market 13
  17. 17. Banks Insurance carriers • Banks have an opportunity to build upon their extensive • Retirees are more concerned than ever about risks penetration of households (approximately 90% of to retirement income, giving insurers an opportunity the population has a checking account8) and their to develop new products designed to mitigate these strategic position at the center of checking and credit risks. Insurers face a critical decision about whether to card transactions. This opportunity can allow banks to unbundle insurance coverage from asset management establish a role in planning and managing retirement offerings and how best to achieve this, as their ability income and expenditure flows through retirement to assume these risks is a core strategic advantage over income accounts. On the down side, banks are exposed players in the other sectors. to erosion of their core account base if competitors make major strides in developing and marketing such accounts. • Insurers’ principal advantages in pursuing the retirement income market opportunity are expertise and brand • Key advantages include a wide array of CDs and other recognition for managing risk, existing payout products, low-risk, FDIC-insured products; frequent customer touch access to face-to-face distributors (agents and points; and the ability to provide reverse credit products independent advisors) who have consultative selling to monetize real estate assets. skills, and significant employer group relationships. • Some banks, however, may be challenged to position • Obstacles that may hamper the ability of insurers to themselves as knowledgeable retirement planners given realize market potential include limited brand permission the limited advisory skills of their sales staff (outside for investment advice, relatively few customer touch of private banks) and their current lack of payout and points, distance from the end customer, and a historical retirement-specific risk protection products. slowness to innovate. Mutual fund companies • The dominant position of the largest mutual fund companies (as measured by assets under management) in the defined contribution plan market means that this sector has the greatest exposure to asset erosion as the baby boom generation retires. But they are also in a potentially good position to capture rollover assets. • Many of these large mutual fund companies have well-developed direct distribution channels and a reputation for customer service and low-cost delivery. These advantages, coupled with their asset management capabilities (though potentially tarnished in the current financial crisis), may help them capture rollover assets, especially when the market recovers. • Still, mutual fund companies will likely need to reposition and broaden their brands for the retirement income market. Key issues to overcome include a historical reliance on growth-oriented investments and associated expertise, the absence of risk protection products and features, and a lack of strong personal financial advisor relationships. 8 Federal Reserve Board 2007 Survey of Consumer Finances 14
  18. 18. Brokerage/investment management firms • Major weaknesses include the absence of payout • The brokerage/investment management firms have a and risk protection products, their growth investment potentially strong competitive advantage in their ability orientation, and comparatively limited employer group to capture the rollover assets of affluent retirees, given relationships. their deep penetration of this segment. Given the potentially significant investment and degree • Other strengths include face-to-face consultative of change that may be required, not all financial services selling skills, asset management skills, and expertise in companies can or should choose to compete in the managing income and expenditure flows through CMAs. retirement income market. Those considering whether to Finally, their historically favorable position with more enter this market should look beyond its aggregate size to affluent customers may mitigate the need to develop ensure they understand what actions they will need to take capabilities to access and serve the mass-affluent market. to be successful. Exhibit 5. Retirement income market positioning by financial services sector Opportunity Advantages Challenges Banks • Management of retirement • 90% household penetration* • Lack of guarantees and transaction flows • CD’s/FDIC insured products retirement-specific insurance • Fixed income investments • Frequent customer touch • Limited consultative selling/ financial • “Reverse” credit products advisory skills • Mortgages/credit products • Limited employer group relationships Insurers • Payout/annuity products • Existing payout products • Limited brand recognition • Insurance against retirement risks • Expertise/brand recognition for for investment advice • Financial guarantees risk management • Infrequent customer touch • Agency/broker network • Slowness to innovate • Employer group relationships Mutual funds • Capture rollover from defined • One third of household investable • Limited personal advisor relationships contribution plans assets under management* • Lack of guarantees and • Target date and payout funds • Employer group relationships retirement-specific insurance • Financial planning/advice • Direct sales channel • Growth focus • Perceived low cost Brokerage/ • Capture rollover from defined • One third of household investable • Lack of guarantees and Investment managers contribution plans assets under management* retirement-specific insurance • Target date and payout funds • Face-to-face consultative selling skills • Growth focus • Financial planning/advice • CMA accounts • Lack of employer group relationships Source: Deloitte analysis, 2008 * Source: Federal Reserve Board 2007 Survey of Consumer Finances Mining the retirement income market 15
  19. 19. Take action to win Baby boomers likely represent the largest and richest retirement income market in history. The opportunity it presents has been long anticipated. Those companies that are willing and able to take advantage of this future growth engine will need to take action: The leading edge of the baby boom is beginning to retire. Financial services companies that want to succeed in this market will need to innovate in their offerings and adapt their operating model to deliver their products and services consistently and efficiently. Exhibit 6. Mining the retirement income market Customer knowledge Product development IT infrastructure Positioning Channel optimization Culture Brand Advisor education Performance measurement Service model Source: Deloitte Key actions financial services companies should consider include: 1) Build your end customer knowledge. When the 3) Define and communicate your brand. Get started; task is to address new and unmet needs, the past may it can take a long time to establish a brand. Craft a value not be a reliable guide. Insight into consumers’ concerns, proposition – product and customer experience – that preferences, and behaviors is necessary to understand is customized to the needs of your target market and what is lacking in the current market and to develop that differentiates you from the competition. Develop a creative solutions that fill the gaps. Start by capturing message and select media that address the distinctive and analyzing information from your existing customer perceptions and attitudes of your target segment. For interactions and transactions. Supplement internal data example, if pitching to consumers who are uncomfortable with primary consumer research and external consumer about retirement, the message might be about taking databases. the worry out of retirement rather than promoting an adventure-filled retirement. 2) Decide where you want to play. Segment and size the market to identify customers, products, services, and 4) Enhance your product development capabilities. channels that offer your company the greatest opportunity Whether a product leader or follower, you will likely need for profitable growth. Analyze your current and target to bring products to market more quickly and efficiently businesses to understand overlaps and differences, and in the future. Involve your customers and distributors better position your company to chart a viable path from up front to test market concepts and features. Engage where you are today to where you want to be. IT, operations, risk management, and legal early in the development process to prevent downstream problems and rework. Simplify where possible and reduce low value-added variation by utilizing a common “chassis” and reusable “components” wherever possible. 16
  20. 20. 5) Align sales and distribution channels and 8) Strategically align the IT infrastructure. Technology incentives. Analyze the cost to serve of distribution is a critical enabler across all aspects of the operating alternatives and understand the sensitivity of these model – advanced consumer analytics, retirement income economics to changes in such factors as volume, planning tools, risk management and compliance, product compensation structure, and consumer acceptance administration, customer contact centers – and the list of of new media and channels (e.g., Internet). If you rely needs and potential costs can appear endless. Resist the on independent distributors, evaluate them as you pressure to respond to changes in business needs with would end-consumers (i.e., segment distributors to systems and solutions that are deployed with tactical understand both their business needs and their potential objectives, as this commonly leads to duplication of for generating profitable revenue from your target infrastructure across business units and departments. customers). Focus on the most profitable channels, craft Focus on a long-term portfolio of initiatives that value propositions for them, and be prepared to manage balances short-term benefits with sustainable long-term multi-channel approaches. restructuring. 6) Equip your financial advisors. Financial advisors 9) Develop a reinforcing culture. Whatever your have a critical role in assembling appropriate solutions brand positioning – high service, low cost, innovation – for their clients and may need assistance understanding infuse the core values in your culture. Begin with a clear how the issues and options in retirement differ from those articulation of the vision from leadership, understand during the asset accumulation phase. Ensure that financial what capabilities and attributes your employees will advisors who represent you have the education, tools, and need to deliver it, and align your recruitment, training, incentives to provide advice and service to end-consumers performance measurement, incentives, and organizational that is appropriate and consistent with your brand. structure to reinforce these values. 7) Adapt your service delivery model. Start with 10) Measure performance and modify your approach: an audit to assess the quality and consistency of your The retirement income market is just emerging and how current customer experiences and identify gaps with it evolves will depend in part on how financial services your brand promise. Analyze the cost of alternative companies respond to the challenge. Ensure you have solutions versus the pricing inherent in your product/value appropriate “learning loops” in place to evaluate how proposition. Common improvement opportunities include consumers are responding to your value proposition, and expansion of channel choices, seamless inter-channel be prepared to modify and adapt your approach on an routing, real-time customer analysis, automation, tighter ongoing basis. management of routine execution, and realization of cost economies (e.g., operational consolidation, relocation, outsourcing, spend reduction). Mining the retirement income market 17
  21. 21. The retirement income market represents a powerful future growth engine for financial services companies seeking to rebuild reputations and consumer relationships. The financial services companies that choose to mine the retirement income market will need to innovate, build new capabilities, and commit to the long-term process of establishing their brand promise and ensuring their ability to deliver on it. Deep insight into consumer needs and preferences, creativity and innovation, a clear market strategy, and an unflinching commitment to continuously assessing their strengths and vulnerabilities will be essential to success. 18
  22. 22. Author Ann M. Connolly Director Deloitte Consulting LLP +1 212 618 4325 Contributors Richard Berry Mary Kearney Priti Rajagopalan Director Director Manager, Deloitte Research Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Services LP +1 212 313 2622 +1 617 437 2684 +1 609 806 7420 Joe Guastella Don McNees Dan Rosshirt Principal Principal Principal Insurance Consulting Leader Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Consulting LLP +1 212 618 4578 +1 212 618 4586 +1 212 618 4287 Financial services leadership team Jim Reichbach Rebecca C. Amoroso Vice Chairman Vice Chairman U.S. Financial Services and U.S. Insurance Industry Leader U.S. Banking & Securities Leader Deloitte LLP Deloitte LLP +1 973 602 5385 +1 212 436 5730 Cary Stier Dorothy Alpert Vice Chairman Vice Chairman U.S. Private Equity, Hedge Funds & U.S. Real Estate Leader Mutual Funds Leader Deloitte LLP Deloitte LLP +1 212 436 2784 +1 312 486 3274
  23. 23. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this publication. Copyright ©2009 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu. Item #9057 May 2009