Throw conventional wisdom and industry fault lines out the window. Financial services firms, insurers, and healthcare payers admit they will need to add new capabilities as they prepare to serve baby boomers, who will control some $40 trillion in retirement assets by 2020.
Boomers, who make up the wealthiest generation in history, face tremendous uncertainties about how they will fund their retirement, and how wealthy they will be during those years. Those that fail to plan accordingly now will fall short of their expectations.
The companies planning to serve the boomer market run a similar risk of missed expectations, according to a new study by Diamond Management & Technology Consultants, Inc. Unless they consider new strategies now, financial services firms, insurers, and healthcare payers will lack the flexibility to survive in a changing health/wealth market.
For example, while 89 percent of insurers Diamond surveyed believe that "making products simple for their customers to understand" is a source of competitive advantage, only 23 percent believe they have effectively developed that capability.
In its "Retirement Study 2008," Diamond analyzes how the convergence of health, wealth, and risk management is creating new business opportunities for companies that adopt a broader vision of the services they offer as well as a more precise view of the boomers they serve.
Diamond's research finds that many companies are ill-prepared to help boomers meet their retirement needs. Among financial advisors, 77 percent see speed-to-market in bringing new products and services to the boomer market as a source of competitive advantage but only 20 percent have that capability today.
Eighty-nine percent of the bank respondents viewed pricing as somewhat or very important as a competitive lever, but only 51 percent said that today they have the capability to leverage pricing as a source of competitive advantage.
The bottom line: companies competing for boomer business will need business and technology platforms flexible enough to accommodate different boomer market segments, new types of transactions, new federal and state regulations, and competition from multiple fronts.
"Banks, financial services firms and insurers have an enormous opportunity in front of them and they need new capabilities to create the tools and services boomers need," said Aamer Baig, managing partner of Diamond's financial services practice and a co-author of the study. "Boomers need help preparing for retirement, because many lack a strong financial acumen and a rational, long-term approach to do the right thing."
To fully grasp baby boomers' holistic needs as they approach retirement, Diamond surveyed 626 consumers aged 45 and older, asking questions about their health and finances, probing their attitudes, behaviors, and current situations. For comparison, Diamond also surveyed executives at 105 banks, investment firms, and life insurance companies, each with revenues of more than $500 million, to understand how those companies are pursuing this market.
The results clearly illustrate that boomers are not a homogeneous group, and companies cannot treat them as such. Different segments of the boomer population have specific needs based in unique attitudes and behaviors, according to the study. Diamond refers to these segments as Affluent Sophisticates, Aspirants, Retired Settlers, Moderates, and Survivors, and identifies the segments based on consumers' financial confidence and health consciousness.
To obtain a complete copy of the report, send an e-mail to [email protected].
"Companies will not be able to adopt a 'one-size-fits-all' approach toward serving the market," said Baig. "They will need to thoroughly examine the value chain to determine where they are best positioned to meet customers' emerging needs, tailoring their offerings to targeted sub-segments of the boomer population."
For example, Affluent Sophisticates - a quarter of the boomer population - control 65 percent of boomer assets. At first glance, this appears to be a clear target for companies, but a closer look reveals a plethora of companies already targeting these consumers. Therefore, not every firm can serve Affluent Sophisticates and be profitable, and many companies will need to make strategic decisions about which segments to target.
Understanding risk has rewards
"Consumers generally have a poor understanding of risk," said Paul Blase, a Partner in Diamond's Insurance practice, and also one of the study's co-authors. "Most consumers tend to underestimate long-term risk and overestimate short-term risks, whether related to finances or health. This often leads to unnecessary worry-even as boomers under-prepare and under-insure themselves for the long term. Educating consumers about risk is the first step to helping them help themselves."
There is significant benefit to improving consumers' understanding of their own short- and long-term needs. Consumers who exhibit higher levels of financial confidence - regardless of income level-purchase a greater number of financial products and services than do their less-confident, less-educated counterparts. Consider the following:
59 percent of working baby boomers expect to rely heavily on Social Security, and 38 percent have saved less than $10,000 for retirement.
61 percent of respondents say they do not have the funds to support long-term care should they require it. Only 13 percent have long-term care insurance.
46 percent say they could not afford a medical emergency, yet only 21 percent have disability insurance.
What can companies take away from these findings? Banks, insurance companies, and financial advisory firms traditionally focused on managing specific risk characteristics-banks dealt with market risk and income risk, insurance carriers with mortality risk and morbidity risk, and financial advisors with longevity risk and market risk. But boomers need products that are more integrated, products that take into account how one type of risk affects another, according to the study.
Diamond's analysis finds that some consumer needs cut across multiple segments, such as consumer education and understanding risk. But in general, baby boomers are best served through a segmented approach.
Companies need to pick up the pace
"For companies, it means being able to view retirement from two perspectives, simultaneously," said Tom Weakland, Managing Partner of Diamond's Healthcare practice. "Healthcare, financial services, and insurance firms should take a broad view of the overall retirement market, looking across industry lines. At the same time, the vast differences among consumers and their needs should drive companies to remain intensely focused on targeted market segments."
Companies that succeed in the retirement space will have four distinguishing traits that will help set them apart:
Defined role in the emerging market - Trying to be all things to all people is unlikely to be an effective strategy.
Tangible commitment to be a leader in the retirement marketplace - Dedicated resources and capital are required to stake a claim in the retirement market.
Alignment across the organization - Delivering the breadth of products and services retiring boomers expect requires collaboration and cooperation, not corporate silos.
Demonstrated commitment to the well-being of target segments - Leaders will have a deep understanding of the needs and concerns of their customers, and help them achieve a balanced portfolio of health and wealth products.
"Companies need to answer some hard questions about their strategy and their execution capability," said Baig. "But the companies that are successful will be playing a major role in improving the lives of an entire generation as it retires."