Robert Lamb and his business associate Peter Sullivan have designed a retirement income strategy that bucks conventional wisdom by allowing clients to withdraw an initial 6% of invested assets, above the industry standard of 4%, and allowing for a cost-of-living increases for retirees of up to 3% annually. Even when market conditions sour, as you may have noticed they have this year, Tercet does not expect a retiree client’s income to fall.
In fact, Lamb, president and CEO of Tercet Capital LLC, says the solutions offered by the Smithfield, Rhode Island, firm can result in invested assets growing through the retirement period even when income and fees are being withdrawn from the portfolio. Lamb calls the model The Tercet Retirement Solution, and says he has two patents pending on the methodology.
There are three parts to Tercet’s Solution: asset allocation; select mutual funds; and “precise execution.” For asset allocation, the firm places about 65% of a retired client’s assets in equities and 35% in bonds and cash using five styles of investing: balanced-hybrid; global; mid-large-cap growth (the cap size category below large); bond funds; and mid-large-cap value funds.
For fund selection, Tercet looks at mutual funds’ performance within those five styles, and studies them when the market is volatile. The funds are tied to a mathematical calculation for performance. Tercet looks at performance during the “worst of times,” which Lamb calls the true test. These periods include the 2000 and 2001 market shakedowns, the 1987 market crash, and the 1973 Arab oil crisis. The firm reviews the three-, five-, and 20-year periods of performance, and now includes a seven-, eight- and 10-year period to include the market rise and burnout since the millennium.
“We really stay away from mutual funds that are currently hot,” Lamb says. “We like funds chosen by committee [consensus]. We like lower fees. Also, we are 100% independent from the fund companies… we have never taken money from fund companies. We are only paid by the client,” he stresses.
A Proprietary Algorithm
For the “precise execution” element, Tercet uses a proprietary algorithm–the major cliam on the patent applications–on how the fund has performed. If it has performed well, the model redeems more out of it than it did the priot year. If not, the model takes out less for cost-of-living increases.
The Tercet Retirement Solution became available on the Pershing Managed Account Network (MAN) in late January, and is currently available through one of the 10 largest broker/dealers, says Lamb, who reports a second B/D has just signed up as well for the Web-based system Tercet maintains the help desk for advisors and the investing models using 12 mutual funds in those five styles.
The minimum investment for the client is $250,000. However, since life never goes according to plan, and neither does retirement, Lamb says that if a client who invested $1.25 million initially needed $250,000 immediately, the advisor would send Tercet a message and after withdrawing the $250,000, “we would re-run your income levels–now income would be lowered to 6% of $1 million.”
“Flexibility is built into our answer. Sometimes one needs to get into the principal in the real world,” he says. “That is why we say ‘solution,’ not an ‘answer.’ Now you have $1 million working for you, not $1.25 million.”
“It is not just a theoretical construct,” Lamb says. It has been tested “in the real world and with real clients” for about a decade now. Lamb joined Sullivan, who had an established advisory business, when Lamb left his banking career in 2004–he had been CFO of FleetBoston Financial Group. Together, they formed Tercet. It was Sullivan who had been working on the methodology with his retirement-eligible clients for nine years. Lamb had never seen anything like it.
Says Lamb: “Some people assume that we are in the retirement income business while I maintain that we are in the retirement outcomes business.”
Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at [email protected].