It's official. Pensions and social security are no longer viewed as the primary sources of retirement income. As part of On Wall Street's third annual Branch Manager Awards, sponsored by MainStay Investments, honorees were asked about the products and strategies financial advisors are using to fund their clients' retirements. According to the nation's leading branch managers, employee-sponsored plans and Individual Retirement Accounts are overwhelmingly the two largest sources of income for baby boomers at, or nearing, retirement.

However, nearly two-thirds of branch managers believe this will change over the next five to 10 years, with annuities leading the way as the new source of income.

This shift in income sources reflects the changing landscape of the retirement industry, and successful financial advisors are educating themselves and their clients about the latest retirement income strategies.

Personalized Pension Plans

For some time now the financial industry, media, and even consumers have focused on income sources they won't be able to count on in retirement, such as pensions and social security. Meanwhile, financial services firms have been refining, developing, and marketing investment products designed to replace these lost sources of income, and the products appear to be catching on.

One product that branch managers believe is worth taking a fresh look at are annuities that provide guaranteed income. The majority of branch managers (65%) cited annuities as the most recommended supplemental retirement income source. As one branch manager stated: "We consider annuities to be their [clients'] personal pension accounts. Annuities that have guaranteed income benefits attached to them are appropriate for a large portion of the population."

Annuities are not new, of course. While these products have been helping clients achieve a variety of financial goals for many years, branch managers point to product enhancements and the strong demand for guaranteed income as the main reasons why guaranteed annuities are really gaining traction now.

One of the winning top branch mangers said that there is increasing interest in variable annuities and immediate annuities. "Where we really were not using them much several years ago, I think we will see more of that happening, potentially even with qualified plans using variable annuities," he said. "So, I think that's probably going to be a significant change."

Another agreed that annuities are an important area of growth that many advisors are focusing on now because of the guarantees of income. "There were a lot of older policies that didn't have the benefits that they have now, so we're upgrading older portfolios or older policies that aren't as good as the new ones today. And we also have a lot more clients now very interested in this space."

Yet, another said that in some cases advisors have been exploring whole new channels. "We've seen a significant amount of advisors becoming insurance licensed and requesting us to help them get better educated in annuity and insurance products. And it's been a steady increase in the last several years, so it's something we have supported specifically."

Talking to Clients

The bottom line is that today's retirees face greater challenges than ever, with diminishing sources of income, longevity risk and volatile markets that have eaten away much of their retirement portfolio. Below are a few reasons financial advisors should be talking to their baby boomer clients about annuities today:

• Clients are Receptive to the Idea. Branch managers have stated that clients are receptive to guaranteed income products. This is consistent with MainStay Investments' recent consumer retirement survey, in which 84% of participants said they would be willing to allocate a portion of their total assets in order to guarantee income for life . However, around half said they would only be willing to do so if both their basic and discretionary expenses were covered, indicating that expectations from consumers are high and that financial advisors should be well versed on what the product limitations are.
• If You Don't, Someone Else Will. With the recent consolidation that has taken place in the financial industry, the landscape for advisors has become increasingly competitive. The more products and alternatives financial advisors can offer their clients, the greater the chance that they will keep those customers and gain new ones. Incorporating guaranteed annuities into their business is one way to take advantage of the growing need to provide retirement income to clients.
• It Increases Loyalty and Referrals. For advisors who have primarily focused on the accumulation aspect of managing their clients, it may seem counter-intuitive to think that developing an income strategy for clients can bring in more referrals. But, according to the U.S. Census there are nearly 80 million boomers approaching retirement. Generating a consistent income strategy that will meet their needs is no small task. Advisors that are receptive to the latest retirement income solutions and are successful at creating an income strategy for the clients will surely reap the rewards of loyalty and more quality referrals.
• To Create Continuity of Assets. High-net-worth clients may be more concerned about leaving a legacy than generating income to cover their own retirement needs. Guaranteed income annuities may allow financial advisors to help them do both. Presenting these products is a good way to open up the discussion about what clients want to leave to heirs and perhaps an opportunity to invite other family members in to discuss estate planning.