“Financial firms’ myopic emphasis on retirement planning minimizes consideration of other important priorities,” a new report from Cerulli Associates warns. “This is a disservice to the middle market, which includes more than 70% of investor households under age 40.”
According to the May 2017 issue of The Cerulli Edge – U.S. Edition, “successfully addressing the goal-focused advice demands of the middle-market segment requires scalable technology tools that are interesting, interactive, impartial, impactful, and incremental.”
More than 23 million U.S. households possess investable assets between $100,000 and $500,000, according to Cerulli. “These middle-market households average approximately $250,000 each in investable assets, accounting for more than $5.4 trillion collectively,” Cerulli reports. “While households in this tier have made admirable progress in beginning to accumulate assets, they often fall below the client wealth levels that traditional financial advisers target.”
“Ironically, while these households are not frequently targeted, as a group they are likely to receive some of the greatest incremental benefits by engaging with an adviser who can help guide them toward increased financial security,” Cerulli says. “Improvements in cash flow management, satisfying insurance needs, and increased attention to their portfolios have the potential to markedly increase the long-term financial success of these households, but recognizing and addressing these issues rarely rises to the top of their to-do list unless nudged by a comprehensive advice provider.”
For plan sponsors, it is important to note that investors widely do not approach these topics with the appropriate level of urgency until it’s too late—in the wake of an untimely market correction, layoff, or even death.
“When we look at the sources of financial advice that these middle-market households rely upon, we find that 56% turn to what can fairly be deemed as “low advice” providers—bank deposit arrangements, direct investing platforms, and retirement plan providers,” Cerulli says. “Though many firms operating in these segments try and offer libraries of written or video content that purports to help their clients better understand a variety of topics, they consistently aim to deliver general guidance rather than personalized advice.”
NEXT: From general to personal advice
Sooner or later, Cerulli warns, investors in this segment will ask representatives of their providers for some sort of personalized advice.
“Representatives are generally instructed to direct the inquiring party to the previously mentioned resources or suggest the client seek a more specialized advice source,” Cerulli says. “This model is deemed necessary to limit providers’ potential exposure to litigation if any proffered advice is found to be sub-optimal, but these scenarios invariably weaken clients’ perception of their advice providers and leave the clients’ advice needs unsatisfied.”
Cerulli’s report continues: “As individuals enter the workforce, the one piece of financial guidance they are almost assured of hearing is the need to start saving for retirement as early as possible. While this is usually not bad advice, it is also not likely the type of action that would have the most immediate or long-term benefit to a young investor.”
Instead of “recognizing the importance of the journey, and helping clients maximize the utility of their assets along the way,” Cerulli says financial advice firms have traditionally focused their efforts on helping investors reach “the number.”
“However, this retirement focus generally minimizes consideration of a variety of other financial priorities. Unless middle-market investors actively seek a comprehensive financial planner, they are unlikely to receive even guidance on topics beyond retirement accumulation.”
Information on obtaining Cerulli Associates research is available here.
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