REMARKS OF
Ellyn A. McColgan
President, Fidelity Brokerage Company
SIA Annual Meeting, November 11, 2005
Thank you very much, Marc…
Good morning! How is everyone doing?
It’s been a busy couple of days, hasn’t it?
I hope you are enjoying the annual meeting as much as I am – and are actually learning a thing or two.
I realize you have listened to a number of presentations and have absorbed plenty of information since yesterday morning.
You’ve seen lots of graphs, bar charts and bullet points…
So I’m going to dispense with the PowerPoint today… and drill in on some important trends and issues that I think we all need to be thinking about – and acting on.
I hope most of you were able to hear Ken Dychtwald’s presentation yesterday.
He talked about the Age Wave that’s coming at us … and how Baby Boomers will redefine retirement.
I couldn’t agree more with Ken’s observation that “Retirement as we’re about to see it,
has never been done before.”
I would like to build on Ken’s presentation by focusing my remarks on how this massive demographic shift, increasing longevity and changing perceptions of retirement will impact the financial services industry – and create the biggest growth opportunity many of us will ever see.
My premise is pretty simple: Everything we think we know about the financial services business is about the change.
The service model we know and love today will look vastly different 5 or 10 years from now...
Regardless of what model you represent – self-directed, broker-dealer or registered investment advisor ...
Everything we think we know about our business will change:
the products we sell …
the way we interact with customers ...
how we use technology …
the advice we offer …
even the way we get paid...
You name it … everything will change.
At Fidelity, we have a unique vantage point because our brokerage company serves all three models.
We are probably best known for our retail business, Fidelity Personal Investments, with more than 10 million customer accounts and $640 billion in assets.
FPI primarily serves the mass affluent market – those investors with $100,000 to $1 million – but we also have dedicated teams serving the high-net-worth and Family Office segments.
We are a technology-driven company that has always focused on self-directed investors.
We have made massive investments in Web technology and planning tools that allow investors to make their own decisions and conduct their own trades online...
Or, if they prefer, they can get help from our representatives in our investor centers or on the phone.
We think we have a pretty good model, but it’s not right for everyone.
Many investors prefer to use an advisor or broker to approach the market.
And so, Fidelity also provides clearing and integrated brokerage solutions through National Financial, which serves 65,000 brokers … representing 5.4 million customers and $536 billion in assets.
And while broker-dealers have great potential to deepen their relationships with clients,
we see lots of change coming.
For commission-based brokers, the revenue model will change as older investors trade less.
Many of you are moving to fee-based accounts, but with lower trading activity, what are those fees going to be based on?
And finally, Fidelity provides RIAs with custody solutions and resources to help them grow their business efficiently … through Fidelity Registered Investment Advisor Group, or FRIAG
… representing 2,900 firms with client assets approaching $200 billion.
We think the RIA model, with its one-on-one relationship between advisor and client, is appealing for many people who are retiring … because they get personal attention, comprehensive planning, and objective advice.
But what happens as retirees’ assets decline and advisers’ fees go down?
Each of these models has its strengths … but all will face challenges as we shift to serving this new customer demographic.
Those firms that recognize the changes that are coming and move quickly to adapt their service models to the new reality will be well-positioned to ride the wave…
While those that don’t may find themselves in rough surf … or adrift at sea.
I want to share some thoughts about what we all should consider as we re-examine our service models ...
But first, let me spend a few minutes talking about the significance of the changes I see coming our way … and the size of the opportunity before us.
2005 was somewhat of a milestone on the Baby Boomers’ journey from saving for retirement to living in retirement.
This is the year that the oldest of the Baby Boomers turned 59½, meaning they can begin withdrawing money from their IRAs and other qualified retirement plans without penalty.
We all hope that not many Boomers are starting withdrawals at 59½ …
But over the next 25 years, all 76 million Baby Boomers will move out of accumulation and into the distribution phase of their financial lives.
As these boomers gradually stop accumulating and begin drawing down their assets, the impact on our industry will be profound.
We will need to develop a whole new model for distribution, even while we continue to support generations to come in getting onto the accumulation escalator.
I think we can all agree that the last 20 years for the brokerage industry has been focused on wealth accumulation.
We’re in business – and our customers do business with us – to watch their assets grow over time.
And we have done a fair job on the accumulation front.
We have helped millions of people invest trillions of dollars in stock and bond markets – directly and through a host of savings vehicles likes IRAs, 401(k)s, and mutual funds …
… thereby creating the first mass generation of investors in American history…
… and bringing equity ownership to a majority of American households.
We have a lot to be proud of.
The Next Big Thing
We have had a remarkable run selling growth investments to growth investors … and every one of us has benefited from that stretch of growth and accumulation.
But while we continue to improve our efforts in the accumulation phase, I want to suggest to you that the next true value we bring to investors will be to help them plan for the distribution phase of their financial lives.
Many of the assumptions we have held for 25 years are no longer valid.
Crazy as it may sound, the next huge growth opportunity – and challenge – for our business lies in helping people take their money out!
Yes, take money out…
‘Out-vesting’ rather than ‘in-vesting’…
Our industry has an obligation not only to guide investors through the accumulation phase,
but also to help them finish what they start.
More than ever, investors are asking for help preparing to live in retirement.
They are increasingly aware that the stakes of not having a plan are high – and rising.
No wonder … look at the challenges they face:
First of all, Americans are living longer.
Today, for a couple both aged 65 or older… there’s a 50% chance that one will survive to 92 years… and a 25% chance of one making it to 97.
That’s great news! More years to keep doing what we love!
But this increasing longevity also means that people should be looking to accumulate enough money to last 30 or more years in retirement.
That means, if a worker gets started saving for retirement in her early 30s, she will have roughly 30 years to save it … and 30 years to live on it.
I think we all know that very few people are planning to support themselves in retirement well into their 90s.
Yet Social Security and Defined Benefit plans … which traditionally replaced a large share of pre-retirement incomes … no matter how long a person lived … are both shrinking …
So more responsibility has been shifting to individual Americans to save, plan and invest for their own retirements.
Meanwhile, the cost of health care and health insurance is soaring.
A Fidelity research study released earlier this year found that a 65-year-old couple retiring today, with no employer-sponsored health coverage, would need an average of $190,000 for health costs not covered by Medicare or Medicaid over the next 15 to 20 years.
$190,000 just for health care.
And, of course, a catastrophic medical event could easily consume a much larger portion of a portfolio.
Failure to provide insurance coverage for these costs or for unexpected nursing home and rehabilitation costs can have a devastating effect on any lifetime income plan.
This risk is so substantial that we at Fidelity believe health insurance itself – and long-term care insurance – must be seen as a pillar of retirement security along with pensions,
personal savings and Social Security.
So, we’re living longer, health care costs are soaring, we’re taking on more responsibility for saving for retirement and managing our retirement income…
And, of course, there’s always the persistent threat of inflation.
No wonder people need help!
Those companies that can keep improving their trusty, accumulation-centric business models … and then rise to meet the retirement income planning challenge …
… will be poised to capitalize on the biggest growth opportunity any of us is likely to see in our lifetimes.
How big is this opportunity?
The $20 Trillion Opportunity
According to the most recent Cerulli Associates estimate, by 2012, investible assets controlled by Americans over age 60 are expected to approach $20 trillion.
This is likely the biggest flow of capital up the age curve that any of us will ever see.
And keep in mind that capturing just one basis point of this huge $20 trillion opportunity equals $2 billion!
Even in 2012 …
as far as the Cerulli data projects …
…There will still be roughly 50 million Boomers who haven’t yet reached retirement age…
The youngest Boomers won’t even turn 60 until New Year’s Eve 2024!
So, we’re still in the first inning of a nine-inning game…
The bottom line is that the people who control a major chunk of America’s wealth are aging …
their financial needs are changing…
and many are ill-prepared to manage their money for lifetime income.
Our own research at Fidelity shows that only 1 out of 4 retirees have completed all the key components of a retirement income plan…
And more than half of recent retirees say they wish they had done more planning before retiring.
The Fidelity Retirement Index, which we released in June, shows that the typical working American household is expected to replace just 59% of projected pre-retirement income in retirement …
And only 15% of households are on track to replace 85% or more of their pre-retirement income, a reasonable goal for retirement planning.
There is an immense and growing need to educate investors and help them meet the inevitable financial challenges of retirement.
As the onus for retirement saving falls more and more to the individual, our responsibilities as professional providers are changing.
Guidance and planning are increasingly important.
Understanding the Mindset of Today’s Retirees
As we seek to help investors of all ages achieve desirable outcomes in saving for retirement,
we must understand the new mindset of the pre-retirees and retirees who call on us for help.
These investors are just now starting to dip into their savings, and they’re coming to the stark realization that they may not have enough money saved up.
Or, in many cases, they have no idea what “enough” is…
The key question we’re grappling with is “how much is enough?”
If the average retirement age in the U.S. is 62, how much do these older investors need to ensure a quality retirement?
Of course, the number hinges on many variables…
But I can tell you with absolute certainty what isn’t enough. $42,000.
That’s the median-sized retirement portfolio in this country – and certainly not even close to being enough.
The shortfall that many investors are facing stems from multiple factors, not the least of which ties back to under-saving in defined contribution plans…
Where too many people invest what they think they can afford, rather than what they will need to support themselves in retirement.
We need to change that.
We at Fidelity are working with workplace retirement plan sponsors to help employees get on the right track…
With savings plans that build auto enrollment, auto escalation, and strong guidance to life cycle funds and accumulation strategies.
We’re making similar efforts to guide our retail customers toward effective savings strategies that can put them on the right path to a secure retirement.
Unfortunately, financial planning isn’t very high on most Americans’ spare-time to-do list.
That’s for planning vacations, or shopping for new cars or plasma TVs…
Which is why we need to mildly disturb these investors.
Nudge them a little bit. Pique their concerns without discouraging them.
Tell them that their comfort level in retirement is one of the biggest and best purchases they will ever make!
And make them aware of the risks of procrastination…
Our industry has a serious duty to educate these customers on the risks inherent in failing to do serious retirement income planning,
Just as we educated the investing public on the virtues of investing…
We must help investors face financial reality – and help them establish income plans that make sense given their particular situations.
I’ll say it again – and I never thought I’d say this in my wildest dreams…
The single biggest opportunity in front of us right now is helping these customers take their money out!
The question for all financial services providers is this: Are we ready and willing to go beyond our traditional business models?
Are we all ready to say out loud that helping people take money out is actually a growth opportunity?
Deciding to Play
Let me give you an example of how this has worked for Fidelity.
Being the No. 1 provider of 401(k) plans in this country has its advantages.
We serve millions and millions of corporate plan participants – and we saw this age wave forming within our own business.
That led us to develop something we call the Fidelity Retirement Income Advantage – or FRIA.
We formally launched the program last year … though the work leading up to it began at least two years earlier.
FRIA is the first comprehensive approach to helping retirement savers plan – and act – to turn their life savings into sources of lifelong income that they can rely on – and not outlive.
This effort involves a massive educational outreach – within Fidelity and beyond – to everyone planning to retire.
FRIA has also led us to create new planning services and online tools and to train hundreds of expert retirement income planners.
It has reached across all of Fidelity’s lines of business – from retail to workplace savings to business units that deal with intermediaries.
It’s been a comprehensive, company-wide push – which has resulted in a remarkable,
unprecedented cross-company effort.
The results have been great.
Since we launched FRIA last June, 300,000 people have done lifetime income plans with us – over the Web, over the phone or in our branches.
That’s 300,000 people who are better prepared today to face the challenges of retirement than they were last year.
As a result, we’ve formed deeper relationships with these customers … and pulled in billions of dollar in new assets.
In fact, we find that those who do the planning process with us also tend to consolidate assets with us from other providers.
Helping people plan for retirement can be a growth opportunity.
That’s how it might work.
If you’re anything like us, I imagine your profile is tilting more to the distribution phase of helping customers manage their portfolios.
Over the next decade, I believe the industry as a whole will steadily shift to the distribution end.
If you decide to play in this market, there will be challenges along the way – and I can tell you from our own experiences that the process hasn’t been as easy as we thought it might be.
The challenge was moving beyond the embedded philosophy of growth and accumulation that we had become so accustomed to…
Moving from a simpler product and sales-driven environment…
To a solutions-based culture that helps customers navigate specific complexities and risks ...
Crossing organizational boundaries to reinvent “growth.”
But we have to accept the fact that the accumulation model is changing ...
And we need to adapt our service models to fit the changing landscape.
Five Key Steps to Rethinking Your Service Model
I hope I have framed the issue and made a persuasive argument that the world as we know it is changing.
So, what should each of us do about it?
How can we help ensure that our respective firms are well-positioned to deliver customer solutions that fully capitalize on the retirement opportunity?
How can we make sure we offer our clients what they need to meet the retirement challenge?
I believe there are five key points to consider when rethinking your service model.
First – Know Your Customer.
This may sound elementary … but it’s absolutely essential to understand that retiring customers are not the same as accumulating customers.
It means taking a holistic view of each customer’s complete picture – debt levels,
essential and non-essential spending, tax situation, health status and provisions for long-term care.
It’s not just about money – it’s about wealth, health and lifestyle decisions.
I would also encourage you to involve both spouses in every couple’s financial-planning process.
The fact is, women live longer than men on average, so women are more likely to outlive their husbands.
Yet too many women – even highly educated, professional women – don’t have a clear understanding of their overall financial picture.
That needs to change.
Women need to understand their financial situation and savings and investment goals,
so they can have a voice in setting and achieving their retirement goals.
You will be doing yourself and your clients a favor if you involve both parties in the decision-making process and make sure both have a clear understanding of their financial resources.
Second – Focus on Solutions (Not Products).
We can’t afford to simply sell products; we have to provide solutions ...
Solutions that address the full range of our client’s increasingly complex income planning requirements, including health care and estate and tax planning.
Because if you can’t help them with tax planning, insurance, or wills and estates … or integrating real estate into retirement plans – the whole spectrum – your customers will go to someone who can.
You also need to develop your own points of view that will support your recommendations to your customers.
Have a point of view on longevity…
on distribution rates…
on the types of investments that people aged 55,
65 and 75 should own.
If you have proprietary product on hand – mutual funds, life cycle funds, discretionary asset management – you’ve got a leg up on your competitors.
Annuities serve a meaningful purpose, and mutual funds can complement them nicely…
But we’ve had annuities for 50 years now…
Our product lineup needs to be much deeper.
We need new, innovative solutions.
We need to develop better income-producing products that will serve as effective hedges against inflation, better insurance products to guard against potentially devastating health calamities, and better tax strategies to preserve wealth.
Third – Leverage Technology.
Technology, naturally, will continue to play a major role in allowing us to provide effective solutions.
Under the old model, investors required lots of personal contact.
Boomers value personal relationships too, but they are much more comfortable with technology than current retirees.
I think we have about a 10-year window before the people who really grew up with computers begin moving into retirement.
Investors who are 50 today are going to have much higher expectations for leading-edge technology than today’s retirees.
They expect easy, round-the-clock access to their account information ... and they will want to play active roles in doing research, planning and managing their investments.
As these customers begin planning for retirement,
firms that haven’t invested in technology will be at a huge disadvantage to those that have.
Fourth, Keep it Simple.
Investors want direct, honest, helpful answers.
And we need to respond with direct, honest, simple solutions.
This has become a personal crusade for me.
Remember – 3 out of 4 people don’t even have a plan.
They need simple help – to get them started and give them a better shot at success. This industry is loaded with incredibly smart, talented people.
Sometimes too smart for their own good.
We cannot overwhelm customers with complicated tools, a confusing array of options and intricate solutions.
That’s the last thing they need.
The companies that figure out the right service mix between personal, human contact … and intuitive, user-friendly tools … will have a powerful advantage.
The final point I urge you to keep in mind when rethinking your service model is this: Be Optimistic
I firmly believe that the winners in this market will be the ones who spread a message of optimism.
Remember, many of your customers are terrified they won’t have enough money after all those years of working hard, paying bills and raising their families.
This fear, in my opinion, is why so few have sought income planning help.
The older generation thought of retirement as the Holy Grail…the finish line after years and years of hard work.
They might have moved to Florida, taken up golf, done a little traveling.
But the newer retirees – invigorated by the possibility of 30 or 35 more years – are pushing the envelope a little more…
And they have more to plan for and more to worry about.
So I think it’s crucial that we spread a message of optimism, while at the same time being honest about the challenges people face.
After all, people want to look forward to the future.
They want to feel good about what’s in store for their retirement.
And they should.
Think of all the great things people in or near retirement have already accomplished … getting an education, building a career, raising a family, buying a home.
This is just one more milestone on their journey through life.
Our message to anyone saving or planning for retirement must be one of optimism: You can do this! And we can help.
That’s it – five simple steps to help guide you in rethinking your service model:
Know Your Customer
Focus on Solutions
Leverage Technology
Keep it Simple
and Be Optimistic.
A simple but effective prescription for adapting your service model to meet the ever-evolving and increasingly complex needs of clients planning for and living in retirement.
My Three Requests of You
Before I close, I have three requests of you.
First, let’s lead by example … by making sure our own house is in order.
Make sure you have an effective plan.
My second request is that you look out for your own people as well – family, friends,
employees or coworkers.
Don’t be like the cobbler whose kids ran around barefooted.
Make sure the people close to you understand the importance of planning and saving for retirement – starting with their very first paycheck.
If they are not contributing enough to their 401(k) to get their employer match, tell them to stop leaving free money on the table.
And if they are not saving enough – at least 15% of their income – urge them to earmark a significant portion of any future raises or bonuses to retirement savings.
It’s probably the best advice you can give them.
My third and final request is that you actively support legislation to strengthen incentives for Americans to save for retirement and health care expenses.
The SIA pursues an active legislative agenda … Fidelity supports that agenda, and I strongly encourage you and your firms to lend your full support as well … so together we can help investors meet the retirement challenge.
Closing Remarks
In closing, let me reiterate that we in the securities industry have a lot to be proud of.
Together, we have enabled millions of Americans to benefit from participation in our securities markets – the strongest economic model in the world.
Through mutual funds and other investment vehicles, they are stakeholders in some of the greatest businesses in the world, and they have used the markets for significant social and personal gain.
Now we have an even bigger, more difficult challenge in front of us – to finish what we start.
To help people save and manage their money for their rest of their lives.
I believe that while our industry has already done much good for many…
… our greatest contributions – and our most important ones – are yet to come.
Thank you.
