Understanding the ‘Decision States Model’ and knowing how to use them to discuss key investment concepts will help advisers with their clients.
Whatever age and life stage of your clients, most will live a longer, healthier life than the generation that preceded them. Retirees today also typically enjoy a more active lifestyle than previous generations. These gains in quality and quantity of life come with an implied financial cost, one that requires your clients to stretch their savings over multi-decade timeframes that will include unpredictable market conditions and personal challenges.
The SKI generation (spend the kids’ inheritance) has been getting a lot of airplay of late. Another acronym gaining attention is FORO – the fear of running out. How do clients balance spending to support their desired retirement lifestyle with managing their retirement savings so they don’t outlive them?
Australians want to enjoy this ‘third age’ that can now be expected to last 25 years or so beyond retirement. Rather than living with fear and uncertainty, a recent research study indicates that many Australians approaching or in retirement want to look forward positively and are open to education and advice to achieve their retirement goals.
This research surveyed 827 pre- and post-retirees from the Epic Retirement community[1]. These are individuals who are engaged with retirement. Of the respondents, 62 percent are aged 55-65 years, most of whom would be pre-retirement. A smaller number (13 percent) are aged 45-55, with the remainder over 65.
The objective of the research was to gain insights into the participants’ financial confidence, retirement planning needs and their understanding of retirement products and concepts. We share some of the findings in this article, notably around attitudes toward retirement income products and the desire for advice and information about these products. Using the Decision States Model (DSM)[2], this article will explore the drivers and barriers when it comes to discussing retirement income products with your clients.
The results of our research demonstrated that there’s power to the retiree who has access to money, knowledge and education. With retirement potentially lasting decades, being able to navigate it with skill and confidence is more important than ever. This level of empowerment is best provided by the experts: the financial advisers equipped with the tools and knowledge to best position their clients for a long and happy third age.
Retirement income products
In the two years since the implementation of the Retirement Income Covenant, there has been significant innovation in the sector. Although super funds have been under fire from ASIC and APRA regarding the speed with which they have innovated to deliver appropriate retirement income products, advisers already have access to the tools clients need to meet their income needs in retirement.
Of the respondents who participated in our research, 82 percent of the cohort had heard about traditional annuities when questioned (figure one), and 17 percent said they would consider them as a source of retirement income (figure two). Further, 59 percent said they would ‘maybe’ consider annuities as a source of income in retirement. This presents an opportunity to advisers; with education, this evolving product category could be more appealing to your clients than the traditional legacy annuity products of the past.
When asked why traditional annuity products were not appealing, the five key reasons (in order of importance) were:
- I don’t know where to get information about these products.
- Inflexibility.
- Access to money.
- Cost.
- Death benefits (notably, lack thereof).
Despite longer lives and the emergence of ‘FORO’, lifetime income streams remain underutilised and lesser known (figure three). Just five percent of respondents hold a lifetime annuity and while nearly 50 percent have heard of lifetime income products, most respondents indicated a lack of knowledge about them. Extrapolating that across the broader population, this provides advisers with an opportunity for discussion and education with relevant clients when planning for retirement.
When asked what they want from retirement income products, respondents clearly articulated their requirements:
- Guaranteed lifetime income.
- Income certainty.
- Easy access to their money.
- Investment growth.
- Protection against market volatility.
In short, your clients want to ensure they have enough money for the long lives ahead of them. It’s good to know that the ingredients are there today to make this happen.
The Decision States Model
The DSM[3] (figure four) is an adaption of the traditional marketing funnel for financial services. You can use it to take a client through a series of ‘decision state’ stages. This ranges from being unaware about a specific product or service – in other words, the client does not know what they don’t know. It moves into awareness, to interest and finally through to the capability to make a decision.
The DSM includes a key point in decision making “capability”; this has been identified as the primary determinant of a client moving from interested to ready to make a purchase decision. This might be a broad decision, such as engaging with you for financial advice, through to more granular decision making, such as the selection of a specific retirement income product.
Designed to lead and ease clients through stages of product or service awareness and knowledge, the DSM aims to support clients to make sound decisions. Each decision state should be observed and treated as discrete steps. Solution design should consider hypothesised behavioural influencers as enablers or as barriers to a client moving from one decision state to the next.
For retirement income products, many people are stuck in the pre-aware stage…both unaware of the available products and uncertain as to they might need it or how it would help them meet their retirement goals.
The DSM[3] provides both opportunity and challenge. The opportunity to understand the characteristics of clients at each stage of the DMS; the challenge, overcoming the hurdles that may limit clients from moving to the next stage of the DSM, to reach the point where they are capable and ready to make a decision.
The DSM and retirement income products
Throughout the DSM journey, you need to consider the following:
- incorporate framing constants into your conversations with clients – ensure each feels they have control, support and reassurance
- highlight the multifaceted benefits of new generation lifetime income products, particularly in comparison with legacy products
- tailor information delivery to the specific decision state of the client
- build trust through conversations and personalised and relevant information delivery.
The following content examines each of the decision states and some of the common drivers and barriers that may affect clients at each stage.
In the pre-awareness stage, your client may not have thought much about retirement. They’re busy accumulating super and possibly other forms of retirement savings. However, they haven’t yet thought about how those savings might convert to retirement income when the time comes. This is the time for advisers to praise clients’ retirement savings achievements and start the conversations about the move from accumulation to decumulation. What might the client’s needs be? How best to meet those needs? What products might best deliver to ensure clients meet their longer term retirement objectives?
The noted earlier in this article, the research found that respondents wanted several things from retirement income products, namely:
- Guaranteed lifetime income.
- Income certainty.
- Easy access to their money.
- Investment growth.
- Protection against market volatility.
Engagement with clients at this stage is important to be able to move through the DSM. Having your clients articulate their needs and expectations to be met by retirement income products can help you appropriately direct the conversation to move each client through the states of the DSM. Depending on the client’s timeframe and life stage, this might happen over time, or be something with time sensitivity that has to occur more quickly.
There are a range of drivers and barriers at the pre-awareness stage, which include:
Advisers need to focus on both the drivers and barriers. By addressing both you will build trust and credibility with your clients as they move through the states in the DSM.
At this stage clients will have heard about annuities and perhaps lifetime income products. However, given the inherent complexities, chances are they do not understand the products – how they work or how they deliver on their objectives. Clients are often motivated to learn more…however, it’s important to avoid financial complexity and jargon lest that barrier prevents them from moving forward. Instead, focus on framing the problem as articulated by the client (‘I want income certainty in retirement’, or ‘I am scared of running out of money in retirement’, or ‘I want my retirement income to have some protection against market volatility’). Drivers and barriers at this stage include:
At this stage, your client will have a basic understanding of lifetime income products but are not yet capable of making an informed decision. It’s important for clients to understand the value that lifetime income can add to their retirement and how such products can meet their needs and enable them to fulfil their retirement objectives. Drivers and barriers at this stage include:
Once your client is capable, they are ready for decision making. It might be to make an immediate decision to purchase a lifetime income product, it might be a decision to do so in the future – or it may be a determination that this is not the right product for them. As with other stages of the DSM, there are drivers and barriers at this final stage. The main drivers and barriers to attaining a ‘choose now’ state include:
It is by understanding actions within decision states that can help advisers predict and optimise client conversations. It is also important to understand your client’s mindset in each decision state and consider the behavioural influences that form rational or emotional drivers and barriers; these may influence the client’s progress through their individual decision states journey.
As waves of baby boomers retire over the coming decade, it is imperative to discuss the transition to retirement, ensure retirement objectives have been defined and that retirement savings are best utilised to meet those objectives. The DSM provides a robust framework for financial advisers to guide their clients through the often-complex process of making sound product decisions.
By leveraging this model, advisers can systematically assess the decision-making stages their clients are in, identify potential barriers, and tailor advice to meet specific needs and preferences. This personalised approach not only enhances client satisfaction and trust, but also promotes more informed and confident financial choices. Ultimately, the DSM should be seen as a valuable tool in the advisers’, as it helps to ensure that clients receive comprehensive support as they navigate funding their retirement.
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