Editors Note: Still River Retirement Software develops and markets retirement income planning software. For further information, contact Chuck Yanikoski at csy@StillRiverRetire.com

We are in the eighth year of the new century, and about the same length of time into the financial industry's focus on preparing for the onslaught of Baby Boomer retirees. Yet our main accomplishment seems to have been to produce a lot of disappointment, if not outright failure.

Five years ago, the future of retirement income planning looked like a wide-open field. If most of us were confused then, it's because there were so many possibly productive paths that it was hard to choose one. If we are confused now, it's because most of those paths today look like very bumpy roads, or complete dead ends. What will we be saying five years from now?

Why we are failing
In 2005, we at Still River produced an article similar to this, looking ahead five years. So far, most of what we wrote about has not happened, because the industry has persisted in a fundamental error we all were taught to avoid in Marketing 101: focusing on what we need to sell rather than on what the customer wants to buy.

Depending on who we are, we want to sell investment or savings products, annuities, IRA rollovers, maybe long-term care insurance. These are all valid products, but they are not what retirees fundamentally want. Affluent retirees don't have to worry about running out of money, and just need more of what they already have. Non-affluent retirees know they are at risk, and what they seek is comfort and enjoyment for the present; security for the future; and confidence that they are making the right moves when faced with a panoply of difficult decisions that will permanently affect their lives.

Of course, to some extent, the industry is indeed marketing these concepts. But they are not selling them, because they aren't equipped to do so. Customers see an appealing ad about how Company X is going to usher them into a story-book retirement. Then they respond, and get a pitch for the usual products, a calculator that tells them something that's neither correct nor helpful, and, if they are lucky, some generic advice on financial issues.

A sharp division between the accumulation phase and the retirement phase. The financial industry has approached the income planning market by extending what we know about accumulation planning into this new realm. But, this just doesn't work. Income planning is not at all like accumulation planning. Apart from the obvious facts that both involve people and both involve money, they have almost nothing else in common — and in many ways are polar opposites. Entirely new ways of thinking are needed, and so far few have pursued them, or even recognized their necessity.

An emphasis on cash flow management instead of investment management. There are two reasons for this. 1) Investment is only one element that determines whether a household will run out of money or not. Other income sources, expenses, debts, other assets (especially homes), insurance, employee benefits, and general health considerations are all part of the mix. An approach that doesn't take all of these factors into account just isn't doing the job. 2) Investment is not even one of the most important elements. Investment strategy has only a modest impact on the ability of most retirees to remain solvent. This effect is actually understandable intuitively: in an account where balances decrease, compound interest cannot do its work (which is just one example of how everything changes at retirement).

Going beyond cash flow management, too. Serious thought needs to go into the ways that lifestyle, attitude, health habits, recreation, family, and other elements of people's lives in retirement affect their health, longevity, and finances — and how financial stress, or the lack of it, affects their health and longevity. As a financial person, you may consider this a little out of your line. But if you're the retiree, it will make a lot of sense to you, and you're going to want a financial pro who understands it.

An emphasis on service above product. It is not yet clear whether the great wave of new product development for retirees has already crested, or how many of the new product ideas will end up discarded. Although some of these products are clearly capturing sales, it is not certain that they are having a very large impact in the way consumers handle their retirement finances. One could even argue that most of the new products are actually detrimental to consumers, and to the extent they are succeeding, are making things worse. The real competition should be, and eventually will be, about service, not product — about reaching retirees at the right time, giving them exactly what they need, and then sticking with them. The providers who do this will earn the retiree's loyalty and assets to manage, even with ordinary products. Providers who take the opposite tack will end up with an array of fine products that few people are buying, while watching their own assets under management dwindle.

What to look for in 2013 — and beyond
We expect that the wizards of the financial industry will eventually stop running full speed into a locked door, and will take the longer route around — that is, stop focusing on what they need to sell, and start focusing on what their customers need to buy. As industry leaders begin to do this (we hope) in the next few years, the following trends will begin to materialize:

Banks and insurance companies will gain a competitive advantage. The securities firms made zillions from retirement accumulation, and they will continue to do so, because the fact is, mutual funds are just about the perfect product for that need. However, contrary to some of the current advice coming from the investment community, non-affluent retirees should not be "investing for growth," and most of them intuitively grasp that. The banks and the insurance companies have the perfect products for the typical retiree, and they are going to start getting the same kind of smooth ride into the future that the mutual fund companies have had in the recent past. Not that we need to cry for the securities firms. There will still be plenty of retirement accumulation going on, and there are some conservative investment products that the industry can legitimately promote for retirees, once it breaks the habit of promoting inappropriate products. Meanwhile, the interesting attempts of the mutual fund companies to emulate the lifetime guarantees that insurers offer will probably be about as successful as past insurance industry attempts to emulate the investment returns of mutual funds - i.e., successful enough to be worth the effort, but always looking a bit like an attempt to make a zebra by painting stripes on a horse.

The sizzle will be in the marketing, not in the product. Today, companies are using product and service innovations to set themselves apart. This has been possible, and almost unavoidable, in a field so wide open. But this openness is already starting to close, and not much has been gained in the meantime. Looking ahead, products and services, including software such as my company produces, will be commodities, much as we see today with retirement accumulation, education funding, and other traditional financial needs. What will set companies apart is not what they offer, but how they offer it — meaning marketing, and delivery. Most of the winners in five years will not be those who do something unique, but those who do the common thing best — delivering the right advice at the right time, and delivering the right products at the right price to fulfill that advice.

Your customers won't need you for this. My company is going to put your company out of the retirement income planning business. This is not a sales pitch: it's a warning shot. We don't need the financial industry to back us. We are currently launching financial planning software for direct sale to retirees and near-retirees that is far more attuned to the needs of your customers than anything you offer, or are likely to create. For a hundred dollars or so, your customers will be able to determine without your help whether they need your products or not, and also decide what other financial strategies they need to adopt. In only a few years, many people will be able to get this service even cheaper, some of them for free, through their employers or through professional or voluntary associations — sources they may see as less biased than you, when it comes to financial advice. Yes, you can still reach people, because you have the advertising clout and the distribution systems to do so, but for your offerings to be attractive, they are going to have to be a whole lot more powerful and more client-focused than what anyone in the industry has done so far.

The main competition will be on price. If your products and services become commodities, and your analytical and advisory tools and materials can be overmatched cheaply or for free, where do you compete? As always, marketing counts, and you can always hope for an edge there. Beyond that, the substantive competition will be on price. During the accumulation phase, we compete over investment performance. With retirees, the competition will instead be for net yield balanced against safety. (Someone will come up with a combined yield/safety rating system for retirees eventually, comparing all kinds of investment/ savings products on the same scale. Is it too late for me to patent that?) Of course, if you intend to focus mainly on affluent retirees, that is less of an issue, but these people don't need "retirement income planning" anyway. Typical, non-affluent retirees, however, understand that they have limited financial means that have to last an uncertain amount of time and cover an unknown number of future contingencies. They will have both the time and the desire to find the best deal for themselves. You should be the ones offering it.

There will be clear winners and losers. It would be hard to pick more than one or two companies that seem to be winning the "retirement income planning" battle today. But that will change. The stakes are very high, and the Baby Boomer retirement era is already here. Some companies will figure out soon that they have to stop doing what they are comfortable doing, and start doing what they need to do. We understand that this is much easier to say than to achieve, and that most large financial companies have significant institutional and cultural obstacles standing in the way of the kind of radically different approach that is required. But now that so many have been disappointed, our guess is that some will decide to bite the bullet and do what it takes to win, even if it goes against the grain.

What do you do now?
Stop trying to think "outside the box." Forget the box — in this market, it never existed. Instead, think inside the retiree. Think about what your parents needed when they retired. Think about what you (and your less affluent peers) will need when you retire. Then find a way to deliver it. It's your best hope of success. Otherwise, by 2013, the one thing you can safely predict is that the world will have passed you by.DSG

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