From the September 2008 issue of Research Magazine • Subscribe!

September 1, 2008

The Strategist

Talk about retiring today and it's enough to scare some people to death. That's not surprising considering the back story: the disappearing pension, rising health care costs, the credit crisis, the housing slump and market volatility. On top of that, we're going to be living a lot longer.

The picture isn't lost on Michael Colon, chief operating officer of Deutsche Asset Management Americas and DWS Investments, where he also serves as director of retirement strategies.

"You see it and read about it every day. Statistics we've just come across in our own organization show that if you look at the last 10 years of the S&P 500, it's more or less flat. We haven't seen a decade of flat equity returns since the 1940s," says the 38-year-old Colon. "And now the most reliable source of wealth in the U.S. -- housing -- is being challenged. Market factors, demographic trends, technological trends -- you throw all of this together and it's a little bit frightening."

Colon, one of the industry's key players on the retirement income front, will share his thoughts on the huge challenge facing today's financial advisors when he delivers the keynote speech at the Retirement Income Industry Association's annual meeting in Boston later this month.

Colon plans to develop two core concepts.

First, he says, the most fundamental principle in investing, diversification, has to embrace new asset categories. Next, outcome-driven products need to mature into next-generation offerings that will be supported by the advisory community.

Here's Colon on diversification:

The concept of diversification has changed in the last decade with global investing gaining momentum along with the continuing practice of diversifying by balancing growth versus value stocks and large-cap versus small-cap stocks. The wave of the future: alternatives.

"You're seeing instruments that your typical investor is not as familiar or comfortable with. Even financial advisors are still getting up to speed with the vast types of alternatives, whether it's real estate or hedge funds or private equity or timber or infrastructure. The list goes on and on," he says.

"The point being is that the fundamental principle of diversification still holds but the way one thinks about it needs to evolve. There's still a lot of work to do there, and it's difficult. There seems to be a new asset category popping up on a monthly or quarterly basis," Colon adds. "Everyone wants to invest in bridges and tunnels and municipal projects and toll roads in Taiwan. And there will be asset categories next year that we're not talking about right now. The point is financial advisors need to expose themselves to these types of investments because to do so serves to diversify the portfolio."

And here is Colon on outcome-driven products:

The most common outcome-driven product is the variable annuity but there's been a fair amount of innovation over the last five years in, for example, structured notes that offer an equity upside while protecting principal over certain time lines. Other offerings include mutual funds with managed payouts and Treasury inflation-protected notes.

Look for all that to change.

"You're going to see significant advancement in this space in the next five years. The managed payout funds you see today I would call first generation. They have shortcomings and they have not been embraced by financial advisors if you look at the flows," Colon notes. "There is an enormous need to enhance the offerings and solutions to assist retirees and people in the five- to 10-year pre-retirement window."

Colon joined Deutsche Bank in 1999 -- without a title and as a member of the strategy team reporting to the chief of the global equities business -- after consulting with the bank on its acquisition of Bankers Trust.

Earlier in his career, as a management consultant, Colon did valuation work on all manner of businesses -- a newspaper route, a farm, a building, a manufacturing company. This understanding for what drives value in a company led to what he does today.

"Without getting too philosophical, it's putting the right people in the right boxes and having the right structure and aligning with the needs of the market and then executing on that need," says Colon, who has two undergraduate degrees and an MBA from Stanford Graduate School of Business. "I roll my sleeves up regularly to get things done."

Philipp Hensler, chief executive officer of DWS Investments Distributors, has worked closely with Colon for just over three years.

While he says he and Colon aren't on the same page all of the time, he adds: "Even if one disagrees with Michael you can always have a very intelligent conversation. It's always very factual. We get passionate about what we do here and sometimes the discussion gets heated, but at the end of the day we always find consensus and solution."

DWS Investments, which underwent a brand makeover in July by dropping the Scudder name, is positioning itself to emerge as a leader in the retirement income solutions space.

"Going back to market demand, advisors are demanding this, clients are demanding this. There are a lot of different organizational types in the game now to develop products," Colon says. "It's a good time, yes. It's also a challenging time."

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Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at ellenuzelac@msn.com.

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