Delegating the Decision: ‘You Handle It for Us’

November 2024

As financial situations grow increasingly complex, many Americans nearing retirement turn to expert guidance. Doing so is understandable: Research shows that, controlling for wealth, investors who work with financial professionals (FPs) fare better across various measures. For example, a 2024 survey of retirement investors, which consisted of Americans aged 40 to 85 with at least $100,000 in household investable assets, found that those working with an FP are more likely than those without FPs to feel that their savings and investments won’t run out if they live to age 90.

Those same retirement investors are also more likely to consider themselves prepared for retirement and to own deferred annuities. Working with FPs is associated with preservation of retirement savings, too: Among investors who recently withdrew or rolled over the entire balance of a workplace retirement savings plan, 60 percent of those working with an FP rolled their funds into an IRA, compared to only 40 percent of those not working with an FP.

While working with an FP is beneficial in the aggregate, there are individual differences in outcomes, attributable to disparities in wealth, financial knowledge and other factors — including the extent to which clients entrust FPs to make key decisions on their behalf. As it turns out, these differences in delegation preference are not merely stylistic and can have important implications for retirement security.

Delegators

Most delegators — those who would prefer that a financial professional make investment decisions for them, with some level of discussion and input — are working with FPs. Among retirement investors who want a paid professional to manage their investments with minimal input, 88 percent work with an FP, compared with only 16 percent of those who prefer to look into investments on their own and make their own decisions. However, among those working with FPs, only about 6 in 10 are delegators. This means that around 4 in 10 clients prefer making their own investment decisions, either with input from their FPs or independently.

Delegators tend to be women, older (retirees) and typically report having lower knowledge about investments and financial products. They tend to value the protection-focused services their FPs provide, placing the most value on protecting their portfolios from losses and minimizing the risk of depleting assets in retirement. Clients who have worked with their FPs longer are more likely to delegate decisions to their FPs, as are clients whose FPs are compensated via fees. The latter fact helps to explain why delegators are more inclined to have their FPs manage a larger proportion of their investable assets. FPs who are compensated from asset management fees have the capacity to manage portfolios, and in some cases, clients can grant them full discretionary authority.

Outcomes

Differences in decision-making preferences can result in disparate downstream outcomes, including the completion of crucial retirement planning activities. Delegators are more likely to have completed seven key planning activities with an FP’s help (Table 1). While some of these activities are relatively easy, like checking projected Social Security benefits at different claiming ages, doing some of these activities without an FP’s involvement is probably unwise given their complexity and the stakes involved.

Delegators are also more apt than nondelegators to own insurance products. For example, compared with nondelegators, those who prefer to entrust an FP with greater decision-making authority are more likely to own cash-value life insurance (23 percent versus 33 percent, respectively), long-term care insurance (14 percent versus 20 percent, respectively), and deferred annuities (13 percent versus 22 percent, respectively). Investors who want to delegate will seek out FPs, especially those willing to take on more decision-making authority, and these FPs may in turn be more likely to recommend insurance products to these clients. Do-it-yourselfers will have limited or no access to these products in the absence of an FP relationship.

Takeaways

An investor’s preference for entrusting decisions to FPs is likely to be enduring, though it may evolve gradually over time, as indicated by the higher proportion of older investors who prefer to delegate. Accordingly, to maintain strong relationships, FPs either need to adjust to their clients’ preferred style or be more selective in building a client base. Too many “do it for me” clients could be a problem if FPs or their firms/teams are not able to handle the workload, especially if the amount of assets being managed per client is low. FPs should assess preferences the way they would assess risk tolerance or other client characteristics that would inform how they provide services to clients.

FPs working with nondelegators face a greater challenge, as they often lack a comprehensive view of their clients’ finances. Their clients may be more “a la carte,” looking for a specific valued service like tax minimization or estate planning. Yet FPs working with nondelegators still need to ensure that planning activities are completed, and that product ownership and overall portfolio allocation are appropriate for each client.

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