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Asset Management

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Cashing In on Retirement

Fidelity taps a booming market of retirees with its latest retirement-services package.

Baby boomers will bring big business to investment management firms that focus on retirement income planning. According to the U.S. Census Bureau, more than 35 million Americans - one in eight - are currently over age 65. By 2040, more than 77 million Americans will be over 65. A major factor that will contribute to this sharp increase is the 76 million baby boomers - those born between 1946 and 1964, the largest generation in American history - who are closing in on retirement. "By 2012, there will be $19 trillion in the hands of 60-plus-year-olds," says Cynthia Egan, executive vice president of retirement services at Fidelity Investments. "We'll be like a virtual nation of retirees," she continues. "It's a lot of money."

It's precisely this demographic trend that prompted Boston, Mass.-based Fidelity Investments to spend $72 million developing Fidelity Retirement Income Advantage (FRIA). FRIA is an integrated suite of in-person, rep-assisted and online services and tools that target retirees who fall into the category of the "mass affluent," which Fidelity defines as investors with $100,000 to $1 million in assets. Unlike most of the accumulation-centered retirement planning services currently available in the market, Fidelity's release is focused entirely on transitioning to, or living in, retirement. "What Fidelity has put together ... is pretty new and different because it very directly addresses the issues of people who are retired," says Gene Kim, a senior analyst at Financial Insights. Kim adds that although discretionary 401(k) management providers such as Ibbotson, Financial Engines and Morningstar have components of FRIA, Fidelity is "probably the first to put the components all together in a package."

The Evolution of FRIA

When Fidelity first conceptualized FRIA more than two years ago, the firm's main goal was to create a comprehensive service that would help investors plan, monitor and manage their finances during retirement. "People don't understand that they're going to live longer than they think; they don't understand inflation or the tactics of how you create your own paycheck," says Fidelity Investments' Egan. "We [wanted] to help people understand the risks and create tools and methodologies to manage the risks."

Fidelity developed a number of initial FRIA prototypes, working hand in hand with the Fidelity Center for Applied Technology on usability. Sample tools and accounts were tested on focus groups, prospective customers and field representatives. Egan says that one of the firm's biggest challenges was to create a tool that was attractive to a wide range of customers. "Some users really want to take the time, go line by line, and debate whether country club fees or a bottle of Scotch are essential [expenses], while other users want to opt into summary-level discussions of their expenses," she explains. "We had to understand that not every customer has the same attention span or the same need for information and create off-ramps - shorter versions of the interaction - for those customers who need it."

The final package, first announced in June 2004, required the knitting together of the firm's institutional record-keeping systems and retail brokerage technology, as well as all of its internal and external Web-based technology. "This is a real [in-house] initiative," continues Egan. "We've taken the very best thinking from our expert investment managers and planners and married that with Web tool inventions."

FRIA consists of two key tools. The Retirement Income Planner tool, combines assets in Fidelity accounts, non-Fidelity accounts and multiple income sources, enabling investors to create a complete financial plan. The tool guides investors through five key retirement risks: outliving assets, erosion of purchasing power, assuming too much/too little investment risk, spending assets too quickly and the rising cost of healthcare. It offers real-time analysis that can be used to help predict how long assets may last, tips for closing potential income/expense gaps and an action plan for immediate steps. Investors can use the tool independently or with assistance from a Fidelity representative.

The complimentary Income Management Account (IMA) is a computerized personal administrator that monitors the aforementioned plan and presents a holistic view of investment performance, spending levels and income sources such as Social Security checks and pension checks. Investors can program personal reminders (e.g., when to complete their quarterly tax withholdings) and warning notices (e.g., when they're spending over their limits), and an automated representative will contact them via phone, e-mail or wireless device with the necessary information.

Sizing Up the Competition

It would be difficult to dispute Fidelity's claim of being the first to market with such a thorough retirement package, but Financial Insights' Kim isn't convinced that the firm has put its best foot forward when it comes to the underlying technology. "I wouldn't necessarily say that every one of FRIA's components is best-in-class," he says. "When you look at just straight-out investment planning ... I think Fidelity has better capabilities than what it's showing." Kim adds that third-party providers such as Financial Engines, SunGard Wealth Management Services and numerous niche companies offer equal portfolio planning tools.

Fidelity's Egan declines to comment on Kim's criticisms, but a Fidelity spokesperson contends that the Fidelity Retirement Income Planner is "unique in the market." Kim does acknowledge that Fidelity stands apart in that it has been able to overcome the challenge of integrating many of its platforms and services to make FRIA available.

Of course, it's inevitable that other firms will follow in Fidelity's footsteps. And any player that wants to get a piece of the baby-boomer market also must tackle the daunting task of integration.

Tying together data and functionalities that reside in different business units has never been easy for large financial firms. And Kim urges Fidelity's competitors to take their time. "If you're not first to market, don't rush the development project to be second or third with missing pieces of functionality," he explains. "It's better to be sixth with better functionality than second with weaker functionality."

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