Bates Research | 01-09-15
The Retirement Tsunami and Investment Suitability
FINRA released its 2015 priorities on Tuesday, which included a focus on the unique issues impacting senior investors for this year. One of our experts provides his thoughts below.
Guest Post by Expert Ed Harris
According to the U.S. Census Bureau, the oldest Baby Boomers (born 1946-1964) began reaching the magic retirement age of 65 in 2011. The elderly population reaching retirement age will continue to rise to an inevitable peak between 2010 and 2030. While the elderly population numbered 30 million in 1988, it was estimated to be 40 million in 2011 and is projected to zoom to 50 million in 2019, adding the same number of retirees in eight years that previously took 23 years to accumulate. Back in 1940, the ratio of active workers for each Social Security beneficiary stood at 159.4 – by 2010 this had already changed to a ratio of 2.9 workers to beneficiaries, and this was before the Baby Boomer tidal wave began.
Beyond changing the ratio of retirees to workers in the United States, the upcoming wave of retirees will also have a dramatic effect on investing behavior. During their working years, individuals typically seek to grow their assets using a variety of stocks and bonds, but during retirement this shifts from a growth to an income focus, changing their allocation. The prospect of outliving their assets is a prime concern for many retirees, and strategies or investment options that minimize that prospect (but still produce earnings that are sufficient to cover their needs) are heavily favored.
While investment sales representatives must always make suitable recommendations to their customers, this is perhaps even more important when making recommendations to retirees. There are some very good reminders on this topic, including:
- FINRA Notice to Members 07-43, titled “Senior Investors”.
- SEC paper titled “PROTECTING SENIOR INVESTORS: COMPLIANCE, SUPERVISORY AND OTHER PRACTICES USED BY FINANCIAL SERVICES FIRMS IN SERVING SENIOR INVESTORS”.
Though the swelling ranks of retirees create a very significant source of customers for investment representatives, it is important to remember that no one particular investment is suitable for all senior investors, because if such an investment existed, then everyone would hold it in their portfolio. Investment advisors must be particularly attentive to each individual investor’s needs, and in the case of the elderly, more focus than usual must be paid to risk and time horizon.