From the December 2009 issue of Research Magazine • Subscribe!

Retirement Income Reporter: Professional Technique

Contemplating the true nature of retirement planning.

The value of the Retirement Income Industry Association's "View Across the Silos" is reflected in the difficulty of the questions members ask. During a recent conference call, the following question came up: Is retirement planning a profession? The question startled me because I wanted to answer, yes, but I could not articulate clearly why I felt that way.

My first response was to ask: Compared to what? What is the name of the other category if one is not a professional? As you will see in this article, the name of this other category is: technician.

This question led me to look again at sources I had not read since the mid-1980s, including academic memos from David Maister, then an assistant professor of business administration at the Harvard Business School. He was then, as he is now, the go-to source when it comes to the topic of professional services firms. In particular, I wanted to look again at a memo titled "Brains, Grey Hair and Procedure."

In that memo, David breaks the world of service work into three categories:

Brains: where people operate at the creative edge of their practice, dealing with unique projects that require fundamentally different customization from client to client.

Grey Hair: where people deal with issues that are not dissimilar to what they have seen before and in fact consciously work to leverage and to scale up their past experience.

Procedure: where people work with well-defined and well-specified tasks and seek to deliver services in the most timely and cost-efficient manner.

Where does retirement planning fall on this spectrum? The question is important because the nature of the work drives the organizational structure of the services firm. For instance, organizational structures for Brains services are very narrow with few entry-level people supporting top-level people who do the professional work. Strategic consulting services are the typical example.

Grey Hair services are broader organizations with more entry-level people supporting the top-level people. Engineering services provide a good example. Procedure services are very broad, with many entry-level people managed by mid-level people who support the top-level people. Examples include accounting and tax preparation services.

David also presents a useful tool to differentiate professional work from technical work: How much of the service work performed is in "diagnostic" versus "execution" tasks? The more diagnostic work, the more professional the job becomes. The more execution work, the more technical the job really is. Likewise, the more diagnostic work performed, the more the job falls in the Brains category. The more execution, the more the job falls in the Procedure category.

Let's compare investment planning to retirement planning in light of these categories and distinctions. Investment planning is about creating and managing expectations that the markets may deliver. How much of investment planning is in diagnostic work rather than execution work? Estimates may differ.

Retirement planning is different from investment planning because it is not as much about managing probabilistic expectation as it is about delivering specific outcomes. Retirement planning also means that the professional needs to learn about the client's human and social capital in addition to the client's financial capital. We can also expect that retirement planning will not be an exercise in presenting utopian perfection but instead an annual effort in discovering the most tolerable imperfections.

How much of retirement planning is in diagnostic work rather than execution work? Overall, I believe we would agree that, everything else being equal, retirement planning is likely to involve more diagnostic work than investment planning.

Yet general answers on such matters are likely to be misleading. Specific answers require more analysis. And that brings us to another aspect of David's work, which is the creation of a mathematical formula to manage the professional or technical services firm.

Here are its assumptions: Services firms sell time. The conceptual nature of the work determines the structure of the firm. People are the real assets of services firms. Key indicators used to monitor financial performance are different from the key indicators used in product-driven businesses. (In particular, gross margin is not an indicator of performance in a services firm.)Financial success is measured by net income per partner (owner).

There are six key indicators of success needed to make the formula work:

Available Hours: This is the capacity of the firm. It is expressed as the total number of available hours.

Leverage: This reflects the nature of the services rendered by tracking the number of entry-level people that are necessary to support the top-level people. It is expressed as a ratio of the number of entry-level people to the number of top-level people.

Average Billing Rate: This reflects both the nature of the services rendered and the weighted average of the prices paid to the top and entry-level people. It is expressed in dollars.

Average Utilization Rate of the talent: This reflects how much of the people's time is billable. It is expressed as a percent of billed hours to available hours.

Realization Rate: This reflects what invoices are actually collected. It is expressed as a percent of collected revenues to billed revenues.

Net Margin: This reflects how much cash is available for distribution to the top-level people (partners or owners) after all the operating costs have been paid. It is expressed as a percent of net income (before partner/owner distributions) to total revenues.

Now let's look at the formula. It is expressed as an equation with net income available for distribution per partner/owner on the left and the six key indicators on the right. These key indicators are multiplied, one after the other.

Net income per partner = Available Hours x (1 + Leverage) x Average Billing Rate x Average Utilization x Realization Rate x Net Margin

Consider the two extremes of Brains versus Procedure work: If the nature of the work is high-diagnostic and high-customization, there will be few entry-level people to support the top-level people. Therefore, available hours will be low and so will leverage. Average billing rates will be high because of the high relative proportion of top-level people but the market will drive average utilization and realization. Net margin will reflect the frugality or profligacy of the top-level people.

If the nature of the work is high-execution and low-customization, there can be more entry- and mid-level people to support the top-level people. Therefore, available hours will be high and leverage will be high. Average billing will be low because of the high relative proportion of entry-level people. The market will drive average utilization and realization. Net margin will reflect the budgeting and management skills of the firm.

Retirement planning practices are likely to fall in between these two extremes. Some practices may provide services that are heavy on diagnostics and highly customized. These would look like Brains practices with the economics of professional services firms.

Other retirement planning practices may provide services that are heavy on execution and mass-production. These would look like Procedure practices with the economics of technical services firms.

So then, is a retirement planner a professional or a technician? At the individual level, some members of a planning team will focus on the diagnostic aspects of the work, while others will focus on the execution aspects. At the institutional level, retirement planning firms may have more of a professional feel and less of a technical feel because retirement planning requires a large amount of diagnostic work and client customization.

Editor's Note: In 2010, Fran?ois Gadenne's column will appear on our website. Readers are encouraged to continue and expand their exploration of the retirement income world with Mr. Gadenne online.

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