Retirement Confidence on Shaky Ground?

That’s a central observation of this year’s Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI) and Greenwald Associates. While three in four retirees continue to believe they’ll have enough for a comfortable retirement, less than a third are “very confident” – down from 39% in 2016 – of this rosy outcome. Confidence around meeting medical expenses is also down significantly. Here are some of the notable findings, with our observations.

• Confidence in Medicare and Social Security has declined. Since the 2017 survey, retirees’ confidence that Medicare and Social Security will continue to pay as much as they are paying today has dropped by more than 10%. This is no doubt partly due to the steady stream of forecasts of when their funds could be depleted, but it’s exacerbated by the steady influx of new retirees – 10,000 Boomers are turning 65 every day – with ever increasing lifespans.

• Confidence in covering medical expenses has declined. While a reasonably healthy 80% of retirees think they’ll be able to meet basic expenses, only 70% think they’ll have enough for medical expenses in retirement, down 10% from a year ago. In addition, 44% of current retirees report health care expenses are higher than they had expected. For many, the reality of faltering health seems to be overtaking their earlier assumptions of sustained health. Much of this appears to be attributable to lack of knowledge and planning, as 60% of retirees say that workplace education on health care planning for retirement would have been helpful.

• The desire or need to work in retirement greatly exceeds the reality. While nearly 70% of workers who were surveyed report that they expect work to be a source of income in retirement, more than 70% of current retirees report that it hasn’t been and won’t be.

Even against a backdrop of favorable investment returns, retirees’ confidence is eroding. Why does this matter? Because as more and more people move from accumulating assets to living off them, more and more people will need the planning that wealth managers are uniquely qualified to provide.

Diamonds May Not Be Forever After All

De Beers, the largest diamond manufacturer in the world, announced this week that the firm will begin to offer man-made diamonds in addition to mined diamonds. This is a dramatic turnaround for the company that was so instrumental in building the value proposition for natural stones and whose head of research and development, as recently as two years ago, claimed would never do anything to cannibalize the industry.

To try to differentiate between the two products, De Beers has created an alternative brand, called Lightbox Jewelry, that will sell lab-grown diamonds at a significant discount to “genuine” stones. These will be defined by De Beers as affordable fashion jewelry that, in a clever twist on their iconic diamonds are forever slogan, “may not be forever, but are perfect for right now.” Employing this strategy, De Beers hopes to maintain the perceived value of mined diamonds while not losing market share to new brands of manufactured stones that are entering the market. In addition, it is embedding a small Lightbox logo in the Lightbox diamonds, which won’t be visible to the naked eye, but will identify the stones as man-made. The hope is that this will help to maintain the exclusivity of the natural diamond market.

An issue is that the manufactured stones are virtually indistinguishable from the so-called “real” ones. Indeed, from a composition and feature standpoint, they are the same. Once consumers fully realize this, maintaining the higher value for mined stones may be unsustainable. Also, De Beers cannot control supply as it has done for years with mined stones to create artificial scarcity. While a single company can control the most productive diamond mines, it has not been able to slow new entrants into the diamond manufacturing business.

The De Beers story reminds us of similar developments in financial services. For example, the adoption of fee based advisory models by leading brokerages, the introduction of ETFs alongside of mutual funds, and the replacement of active managers by cheaper passive investments evidenced most strikingly in Fidelity’s addition of index options to its product line.

In all these cases, successful products and services with strong and widely accepted value propositions were displaced by alternatives that offered equal or better perceived value. Marketing alone was not sufficient to sustain the relative value of these offerings among consumers. To survive, providers were forced to accept new market realities to sustain share.

Whether it’s De Beers in diamonds or Fidelity in active management, the lesson is that under certain circumstances, in order to survive, a company may have to disrupt its own business, even if it means adapting what was at one time a core and highly successful value proposition.

Showing the Love

Loyalty and reward programs have become a ubiquitous part of the consumer landscape. From coffee shops to food chains to, well, almost anything you can think of (a dental practice we know sends its patients gift cards on special occasions good toward their bill), you can probably find a perks program. For consumer goods companies, birthdays have become a particularly popular time to reach out. Case in point – one recent birthday saw an Optima Group professional enjoying a free coffee from one store, a free pastry elsewhere, a special birthday gift from a beauty goods shop, a free car wash, as well as dollars or a percentage off purchases at a wide array of favorite retailers.

A question we often hear from our clients is do their clients really care about these special perks and rewards, especially wealth management clients. After all, wealthy individuals and families don’t need these privileges, and receiving them is not going to have a meaningful financial impact on their lives. Our response is that that’s completely true, but it doesn’t matter. Why?

•  Everyone loves premium treatment and extra “stuff,” particularly those that don’t need it
•  It tells clients that you recognize they are special and are rewarding them for their loyalty to their organization
•  For those not yet in the “club,” it helps organizations sell through an aspirational marketing message – “you can be part of the club and get these great things too if you qualify”

Of course, special stuff alone is not going to sell and won’t compensate for a subpar offering. The underlying elements need to be at a minimum competitive, but hopefully perceived to be best-in-class. This includes the actual products, service provided, client communications and packaging. In addition, benefits need to make sense within the context of the program and client interests. A company renowned for its baked goods that offers a free salad for every tenth pastry purchased is probably going to raise some eyebrows. But, at the end of the day, if one is offered two comparable products or programs, who wouldn’t want the one that says, “you’re the best.”

The Case for Planning

Schwab is out with the 2018 installment of its Modern Wealth Index, an online survey that this year scored approximately a thousand participants on a scale between 1 and 100 based on how well they say they manage their money and investments. Respondents provide answers anonymously and directly, so the results tend to be a true read of people’s behaviors.

Cause or Effect?
As with other surveys we’ve seen, having a financial plan correlates positively with an individual’s financial well-being: those taking the survey who say they have a plan in place score 68, compared to 50 overall and 44 for those without a plan. Related findings:

•   Three-quarters of those with a plan, say they pay their bills on time versus only a third for those who do not plan.
•   Almost two-thirds of the financially planned group have an emergency fund versus less than one-quarter of the unplanned.
•   Almost twice as many (62% vs. 32%) say they feel financially secure.

Of course, correlation doesn’t always mean causation. Forty-five percent of those who report not having a financial plan say they don’t have enough money to merit a formal plan, which, presumably, may be the same reason they may not pay their bills on time or have an emergency fund. Still, the overall findings jibe with other research we’ve seen that coming up with a plan and committing to it can advance positive financial behaviors and foster peace of mind.

The need for planning shows no sign of abating, particularly with the potential for market volatility ahead. Its demand is acyclical, and it requires the skills that wealth advisors and financial planners are best qualified to deliver.

Ken Hoffman on Strategic Marketing and Branding for Investment Advisers

It’s no secret that today’s investment advisory market is highly competitive.  RIA’s have enjoyed strong channel growth but are faced with rising threats from re-fashioned brokerage offerings and new market entrants. Asset managers are being buffeted by trends towards passive management, fee pressure, and performance headwinds.  All this has made it challenging for investment advisors to differentiate themselves and build distinctive brands that can drive growth, capture market share, and sustain competitive advantage.

We believe the need for a thoughtful, process-driven and systematic strategic marketing initiative for investment advisory firms has never been more pressing.

To read more from Ken Hoffman’s guest column in the IAA Newsletter, click here…

Going from Financial to Fintech

Earlier this month Schwab announced the creation of its new Digital Accelerator Hubs. These Silicon Valley Startup like organizations combine cross-functional talent from different disciplines to employ an Agile approach to “rapidly ideate, iterate and test new ideas related to specific user journeys or business opportunities.” The new units will explore creative solutions across Schwab’s businesses including both individual investors and advisors.

The move by Schwab is just the latest example of how much financial businesses are retooling as fintech companies. Fidelity was one of the early adopters of the innovation incubator when it created Fidelity Labs back in 1998. It wasn’t until 2014, however, that the movement began to really pick up steam. In that year, online broker, TD Ameritrade first introduced its incubator as did Credit Suisse on the banking side. In the years to follow, most leading financial institutions have created some form of innovation sandbox to keep their businesses on the digital cutting edge, from Citi Fintech to Open Innovation at Barclays Bank to Deutsche Bank’s New York Innovation Lab.

Building an infrastructure supporting innovation will no doubt accelerate the pace of change in financial service production and distribution. But it also may impact the culture and business practices of firms who come to recognize that their business is as much technical as it is financial.


How Google Quick Draw is Related to Branding

Google has a fun game called Quick Draw. It’s an experiment in which we (the entire global society) can help teach a neural network to recognize doodles. The more we play and draw, the more the machine will learn how to identify a specific object. To date, there have been over 15 million players who have doodled over 50 million drawings. Drawings of cakes, bees and broccoli are included in the 345 categories. You can play it here.


Brand Recognition

The game got us thinking about recognition and branding. Think of visualizing the financial industry the same way we think about the 126,608 drawings of broccoli on Quick Draw. The world has expectations of what broccoli looks like, just as they have a perception of what financial services companies look like. But not all broccoli drawings are the same, as shown below, some stand out, some look more like actual broccoli and some, not so much. Your brand should stand out too, yet also be recognizable as financial services, as opposed to the travel industry, or any other industry.


Another branding parallel with the Google AI game is consistency. In the Quick Draw data pages, under specific items (like bees), the drawings are generally consistent; a bee has stripes, an apple is round, a hose is long and thin, etc. The game defines the item by how consistent the drawings are.

In our own voluntary, non-scientific experiment, some of us at Optima Group equate bees with stripes.

Strong brands are consistent in their look and tone throughout all media, making them always recognizable and trusted. In fact, it could be argued that consistency is what makes a brand visually identifiable and unique to a company. For example, if a burger place had a big blue sign saying it was McDonalds with no yellow arches, we would be suspicious. McDonalds has consistently taught us what to look for when craving a Big Mac.

Take a look and try the game, it’s a lot of fun—and you’ll be helping train a neural network!

Active, Passive and Factor-Based Investing, Oh My

While not quite as scary as lions and tigers and bears, the many approaches to investment management can seem daunting, particularly when wealth managers are considering what to offer. Throw in the question of proprietary, open architecture or a mix of both, and things really get complicated. And that’s all before we’ve even raised the issues such as the inclusion of alternatives, ESG investing and other more esoteric investment topics. It can be particularly tempting to go for the ice cream parlor approach of offering many flavors in order to be all things to all clients – “you like chocolate, we’ve got that,” “rum raisin, no problem.” Yet, all too often, in the wealth and investment management space, this leads to confusion and a perceived lack of beliefs, not to mention dispersion of portfolios and results.

So what’s a manager to do?

The question that often comes up, as a result, is what approach is right? Not to kick the can down the road, but the answer is, there is no “right” answer. This is a decision each firm must make for itself after thoughtful consideration and one that can be polarizing and sometimes divisive. A small sampling of questions to pose include:

•  In what does your firm, at its core, believe?

•  Can you articulate your philosophy and approach?

•  What is the composition of your current and aspirational client base?

•  Do your beliefs and desired approach align with client needs (if not, either your beliefs or your client base may not adapt)?

•  Is that belief consistent with how you have been managing money; if not, why?

•  Is everyone at the firm in agreement with the direction being taken?

•  Do you have the resources to continue (or to implement) the approach in which you believe?

•  If you don’t, what would it take to enable you to do so?

To the decisive go the $$$

While the exercise may be painful, our experience has shown us that those who can be definitive in their message and their actions are more successful in attracting and retaining clients. Clearly setting, communicating and meeting (or exceeding) expectations in terms of money management results in acquiring clients that are a good fit for your firm and minimizes the potential for unpleasant surprises down the road.

More and More Advisors are Going Social

According to recent research from Putnam Investments, the percentage of advisors reporting that social media has helped them gain clients has increased dramatically, up from 49% to 86% in just five years. These advisors say social media has disrupted how they approach prospects, convert them to clients, and conduct business, all while sharply reducing their face-to-face time. Among the top findings:

•  60% say social media is a “great deal more efficient” than traditional networking.

•  83% say social media has helped shorten the time needed to turn a prospect into a client.

•  Nearly nine out of ten (88%) report that social media has changed their relationship with their clients, through easier information sharing and greater contact frequency.

•  More than one-third maintain that social media plays a “very significant role in their marketing efforts.”

It’s probably no surprise that LinkedIn is where most of the action is (although usage of other networks is growing while LinkedIn usage appears to have plateaued): 73% of advisors engage it for business use, personal use, or both. Its top five uses are to:

•  Accept connections

•  List my company/firm on my profile

•  Request connections

•  Follow companies

•  Display skills

Facebook comes in second, but those who use both report they use Facebook more frequently – an average of 22 times per month versus only 16 for LinkedIn. As one survey respondent puts it, “LinkedIn is primarily for people seeking solutions rather than relationships, which is where Facebook is more effective.”

Most advisors agree that social media has helped them build their business and that greater usage is a top priority. However, almost half are “self-taught,” learning through hands-on experience and friends and family guidance. This may not result in optimal use of social media.

Social media is growing as a powerful sales and marketing tool, and advisors who ignore it, to do so at their peril. Social media needs to be considered and deployed strategically in the context of an integrated approach to prospecting and client nurturing.

Goldman goes retail: say hello to Marcus

Goldman Sachs isn’t exactly the first company that comes to mind when you think mass market banking. For most, in fact, it wouldn’t come to mind at all. Yet, that’s exactly where the company is making a significant move with its online banking platform, formerly GS Bank, now going by the name of Marcus, in homage to Marcus Goldman, founder of Goldman Sachs. During the financial crisis, the firm became a bank holding company as part of its effort not to go the way of other failing investment banks. Initially, that didn’t have much impact on its business; its main “retail” component remained the high-net worth. As revenues from traditional business lines, such as trading, have continued to decline, Goldman has sought out other diversified sources of income, entering into both deposits and lending.

Goldman is said to consider three criteria for assessing a new business direction:

•  Is there an unmet need?

•  Can Goldman identify a competitive advantage?

•  Can the company be successful without market dominance?

Yes, was the answer

The company concluded that the answer was “yes” for both the deposit and lending side, but within very defined categories. On the lending side, its efforts were de novo, offering loans for a variety of purposes, ranging from home improvements to debt consolidation. Lines of credit per load are relatively small, capping out a maximum of $40,000, limiting risk to any one defaulter. The borrower gets to indicate how much they wish to borrow, for how long and how much they wish to pay off per month, giving it a very customized feel. There are no origination or other fees, and borrowers can pay off the loan at any time without a penalty or fee. On the deposit side, in April 2016, Goldman Sachs Bank acquired GE Capital Bank’s online deposit platform, comprising approximately $16 billion in deposits, offering high-yield savings accounts and CDs online, competing with direct banks such as Synchrony, Ally, CIT, Barclays and others. Both the deposit and lending offerings were consolidated under the Marcus brand to reduce any confusion, create a more integrated brand and build awareness among consumers.

The future of banking?

While Goldman has not expressed any intention to go beyond this initial product offering, creating a single, separate direct brand for banking appears to indicate that an expanded set of products and services could be coming down the road, with a checking account being a logical extension. Certainly, Goldman has the wherewithal and the staying power to make an impact in the direct segment. And, Goldman has been aggressive in linking the Marcus brand to Goldman Sachs, which carries a certain cachet. Perhaps, someday, we will all be able to say we bank with Goldman Sachs.