Longer Lives For Clients, Bigger Challenges For Advisors
An individual's life expectancy has a major bearing on any financial plan that is formulated for the individual. Our life expectancy would give us a sense of how many years we need to plan our finances for, especially post retirement. When we choose to work with professional advisors, an increased life expectancy brings with it its own set of challenges that advisors would have to deal with. And the interesting thing is that, not all of these challenges are connected purely to the technical side of financial planning. So the role played by financial advisors and financial planners with their clients would also have to evolve, in order for their services to retain all of its value. Therefore, in today’s post I’m going to talk about the challenges that higher life expectancies would pose for advisors while working with their clients.
The average life expectancy of Indians has only increased over the decades. The life expectancy of the average Indian individual just after independence in 1948 was around 28 years. As per the 2011 census it was approximately 66 years. And at the end of 2022, that figure stands at 70 years. This is borne out by the graphic given below, which charts the growth in average life expectancy from 2002 until 2022.
Clearly, life expectancy in India has steadily grown over the past two decades. There have been brief periods of mild stagnation in the interim (most recently due to COVID-19), but in the broad sense an upward slope has been maintained over the concerned 20 year period. And with continuous advancements in the fields of medicine and health care only mean that the rate of growth in life expectancy will only get more steep in the years to come.
But what impact does increased life expectancy have on financial planning and the work done by advisors? Firstly, given that average life expectancy is currently pegged at 70 years, we may be looking at an average life expectancy of close to 80 years within the next decade. This means that 30-40% of the population have a significant chance of living into its nineties. Also, the current average retirement age is approximately 55 and can be expected to drop further in the years to come. This means the average individual's post retirement phase would progressively get longer. To understand this, look at the graphic below.
So, someone who retires at 50 and lives until 90 would have to prepare for a post retirement period as long as 40 years. Moreover, inflation will be an ever present force that individuals would have to counter in the future. It is therefore upto advisors to formulate retirement strategies for clients that would allow their portfolios to grow while being insulated against inflation, without too much dependence on a source of earned income. Moreover, deciding on an ideal withdrawal strategy post retirement would be another crucial but completely different challenge that advisors would have to meet. And both these challenges are ones where advisors have very little margin for error, if any.
The fact that individuals are likely to live for longer exposes them to the risk of developing long term lifestyle conditions which are predominantly irreversible. Conditions like Amnesia, Dementia and Alzheimers are ones to watch out for since they are capable of compromising an individual's mental and cognitive faculties progressively and permanently. And given that no one is immune to developing these conditions, individuals and their advisors would need to have a plan in place to counteract such possibilities, morbid as it may sound. Therefore it is important for advisors to impress the importance of sound financial documentation on clients and ensure that they have their financial documents in place at all times. They must also make sure that clients inform their families about the whereabouts of their financial documents. I have spoken about sound financial documentation at length in one of my previous articles titled Paperwork That’s Perfect. The important aspects of financial documentation that need to be taken care of are given in the graphic below.
Of course, most of the details mentioned in the above graphic would be available by means of our AIS (Account Information Statement) and Form 26 AS for our tax details, e-CAS (Consolidated Account Statement) for our investments and so on. But in the event that any additional information is required, clients and their families must be well placed to provide it. This may not be possible if clients have lost their mental sharpness and their families are unaware of the existence of the relevant financial documents. Therefore, advisors must ensure that all of this is taken care of by clients in their younger years while their mental sharpness and cognitive faculties are still intact.
In today's world technology is constantly evolving. More and more jobs that primarily relied on human effort are being completely taken over by automation. Jobs in fields such as accounting, taxation and banking are prime examples of jobs which would be substantially if not completely, taken over by automation. For example, we now have the option to receive bank account statements and other bank records online instead of having to visit the bank and coordinate with the relevant officials to get the job done. Therefore, the work done by such officials would quickly lose relevance in the years to come. Other examples of jobs and sectors susceptible to automation are given in the graphic below.
Having to make a drastic career shift midway through one's career is not always easy and equally rewarding, especially during the later years. In light of such a context, it is up to advisors to make clients cognisant of these facts and encourage them to work on strengthening their existing skills and adding new skills to their collection whenever possible. This would help clients ensure that their skills retain relevance and demand for longer periods of time. Where there is relatively limited scope for reskilling and upskilling, adequate financial buffers must be put in place to protect the client against the risk of being laid off earlier than expected and remaining unemployed for long periods of time.
Increased longevity is usually perceived to be a positive thing by most people. But for all practical purposes, increased longevity is a positive only when longer lives are backed by a sound plan and enough money to sustain them. Therefore, advisors must realise this and ensure that they make their clients aware of the importance of planning for a longer life from early on in the engagement and the dangers of not doing so. Increased longevity for clients would also mean that their needs would change rapidly, especially in the years post retirement. This would leave advisors with very little room for error when formulating financial plans for their clients. Because any error that is made is likely to take significant periods of time to be rectified, or worse, such errors may be irreversible. Therefore, the role of an advisor must now evolve from being purely technical in nature to one where technical acumen and subject matter expertise is combined with an understanding of emerging trends in the real world. This would allow advisors to ensure that clients are fully prepared to benefit from a greater life expectancy on the back of financial plans that are formulated with a focus not only on planning for retirement but also everything else around it. It would also ensure that the advice they impart to clients carries and retains value in light of each client's needs at every point in time, regardless of the speed at which clients' needs evolve.