Close Close

Retirement Planning > Retirement Investing


Your article was successfully shared with the contacts you provided.

James Dew’s business is booming these days. He’s seeing a rush of new business from pre-retirees and retirees who are disillusioned with their current advisor now that their portfolios are, in many cases, badly depleted. Like other advisors and retirement income planning experts, Dew, president of Dew Wealth Management in Scottsdale, Arizona, knows precisely why these clients lost a sizeable portion of their wealth: many advisors used retirement income strategies that failed to adequately assess client risk and thus couldn’t weather the market maelstrom.

Indeed, in the quest to generate retirement income for their clients, many advisors relied on their investing-for-accumulation roots, and therefore were not focused on retirement income planning. “True retirement planning first begins with an assessment of the ultimate risk a retiree faces, which goes beyond pure capital risks,” says David Macchia, president and CEO of Wealth2K. “When advisors fail to recognize or manage these risks properly, clients’ retirement security can be extremely harmed. This is what happened in many cases.” Retirement income investing begins first and foremost, Macchia says, “with creating a retirement income floor–a guaranteed income floor–to handle that client’s essential expenses. When you’re using a systematic-withdrawal-type methodology to produce returns, that’s not accounted for.”

Advisors latched on to the systematic withdrawal method back in the go-go stock market days of the 1980s and 1990s, when it was typical for people to “retire at 65 and be dead at 72,” Dew says. In those days, advisors started creating portfolios of stocks and bonds for retiree clients and then, in order to generate income, the advisor would just set up a certain amount to be automatically withdrawn each month (typically 4% to 6% per annum of a portfolio’s value) and deposited into the client’s checking account, notes Dew. So the client’s portfolio, says Dew, was concentrated in “conservative investments that generated income.” Anything left over was placed in growth stocks. That approach works well when the overall markets are doing well. “But when the markets don’t cooperate,” says Dew, “instead of using interest or capital gains for income, you may be spending principal.” When that happens, Dew drolly points out, “it dramatically impacts a portfolio.” Plus, nowadays people are retiring at age 50, 55, or 60 and living to 80 or 90.

What’s more, the tired mantra “the markets always come back,” which advisors use to reassure worried retiree clients that they’ll recover their lost money, doesn’t hold water when money is being withdrawn from their account–and when the market continues to perform badly. “If you’re taking no money out of a portfolio, yes, you can sit and wait for the market to come back and you’ll be fine,” Dew says. “But if you’re withdrawing from a portfolio, you’re doing reverse dollar-cost-averaging and selling a large number of shares at lower dollar values, and that’s just a spiral downward. That’s where people get afraid of running out of money.”

Dew says clients of other advisors who’ve used the automatic withdrawal method–who’ve lost anywhere from one third to half of their portfolio’s value–are now coming to him looking for a solution, which he says he has. Right after the market crash of 2001 and 2002, Dew set up a retirement planning strategy in which he sets at least a 10-year time frame on equities–meaning a client won’t need to touch the money in equities for at least 10 years. Then for the first 10 years of a client’s retirement plan, it’s essential to have “reliable, dependable income from safe, conservative sources,” Dew says, “even if that means having three to five years of cash.” While the rate of return on that cash isn’t going to be good, he argues that “you have to have somewhere to get the income in a reliable, predictable fashion” without relying on the markets cooperating. That means turning to money market funds, laddered Treasuries, laddered high-credit-quality corporate bonds or laddered munis, and CDs, he says.

A Closer Look at Risk

Dennis Gallant, president of GDC Research in Sherborn, Massachusetts, says that advisors who have used a “more deliberative” approach to managing money for retirees, and not one based on their accumulation strategy, more closely scrutinize the retiree’s risk. These advisors “look at retirees and say, ‘We’ve got to deal with longevity issues and inflation, but we also have to mitigate risk,’” Gallant says. “I think that approach has fared well in this marketplace compared to those [advisors] who had taken a slightly modified, less risky approach to managing a portfolio” for their retiree clients.

Macchia agrees. “Advisors have to have a greater sensitivity to the multiple risks retirees face. They have to manage those risks more efficiently than they have, and that includes more than products–it includes assessment of the client’s human capital opportunities, social capital opportunities, and investing capital by only exposing the appropriate portion of that to upside potential, but first establishing an income floor. That’s much different than the way many advisors have been approaching [retirement income planning] traditionally.”

Before totally throwing a wrench into the automatic withdrawal approach, however, there are retirement experts who say that the universe of advisors performing retirement income planning are actually pretty evenly split in their opinions about whether retirement income planning strategies can successfully mirror accumulation strategies.

Howard Schneider, president and founder of Practical Perspectives, a consulting firm to the asset management industry in Boxford, Massachusetts, says that research his firm has conducted found two schools of thought among advisors when it comes to retirement income planning.

One group looks at delivering retirement income using the same approach they use for clients in the accumulation phase: “building a risk-adjusted total return portfolio, and following the classic rule of thumb within the financial planning industry to take down between 4% and 6% of the portfolio each year which becomes the income stream. If you do that for the client, the portfolio should last for an extended period of time,” he says. The second school of advisors–almost equal in size to the first–believe that a strategy that works for accumulation doesn’t work for retirement income. “These advisors gravitate to what we, and others, call the ‘pooled’ or ‘bucket’ approach,” says Schneider, “where they are trying to bulletproof the income, at least over the short term, by allocating specific assets to income-generating securities or vehicles and then progressively investing the other assets in riskier securities or buckets that go out over time.”

Advisors who use the “bucketed” approach for their clients say “they’re able to keep their clients invested in the equity market over time because the clients stay calm during periods of volatility,” Schneider says. Macchia of Wealth2K concurs that it’s much easier to keep clients invested in volatile markets when advisors mix guaranteed and non-guaranteed products.

Macchia presents the scenario this way: “Let’s say an advisor and a client were using a diversified investment portfolio and taking systematic withdrawals to produce income. When the client starts to see that the values in the portfolio are dropping, and dropping precipitously, in some cases the client will say, ‘I want to sell out and take that equity money off the table.’ Once that loss is booked, that money is gone, and the income-generating capacity is diminished.

“So if you had a different kind of strategy–let’s say you’re using a little more complex strategy, maybe a combination of products like income annuities–the security that the client has knowing that the income paycheck is going to be coming each month is very important. It probably will help that client keep the equity positions through even a volatile market.”

Schneider says the jury is still out on which strategy is better–the consensus is that it really depends on the type of client–and “it will probably play out over time and we’ll learn more.” But there are some advisors who are thinking of combining the two approaches and “creating a layer of guaranteed income in the portfolio by using annuities or laddered munis or laddered Treasuries and then putting the rest of the portfolio in a diversified allocation approach for the future.” Schneider notes that it’s interesting that many advisors began moving away from “the total return approach, at least in the years preceding this market, and have decided to take another approach to the marketplace in terms of retirement income.”

Target Date Funds Exposed

While advisors are busy doling out advice to their clients now that their retirement accounts have, in many cases, been hammered, what about retirement plan sponsors? Are advisors taking just as much time to give them advice and help them understand what they should be doing now?

Fred Reish of Reish Luftman Reicher & Cohen in Los Angeles, which specializes in employee benefits law, says that given the poor performance of target date funds, advisors need to be “talking with plan sponsors much more about their target date funds, how they performed last year, and see if that’s what the plan sponsor wants.” Target date funds, on average, were down 25% last year, with 2010 funds dropping 25% to 30%. Target date funds, Reish says, “have to be reviewed from a retirement perspective–what are the goals and aspirations of the plan sponsors and fiduciaries for their participants?”

Reish wonders if the goal is to have the most participants contribute the highest possible amounts while leaving some participants with substantial losses before they retire, or is it “in the last five or ten years, particularly before retirement, to conserve principal and to make a substantial effort to conserve principal? Those are directly conflicting objectives.”

If it’s the highest possible account, he says, “then some people are going to get hurt. If it’s to have preservation of capital be the dominant factor in the last five or ten years before retirement, then for those who retire in an up market, they will have been invested conservatively and will have missed out on some potential gains.” Did the advisor educate the plan sponsor on these issues? Were they all vetted a year ago or five years ago? Did the plan sponsor make an informed decision based on the advice given by the advisor?

If that is the case, says Reish, then everything has been done properly. “If not, then that process has to be done now because, if anything, target date funds are going to grow in popularity and as a result, plan sponsors better make sure they know what they’re buying,” Reish says. Advisors have a role to play as well, Reish argues, to educate plan sponsors “on what they are buying–not that it’s just a target date fund, but [whether it is] an aggressive fund, a conservative target date fund, or a moderate one.”

Reassessing the Relationship

Now that pre-retirees and retirees’ portfolios, on average, have lost from 20% to 30%, and advisors’ assets under management and revenue are down, there’s no doubt that advisors are reassessing how to manage the relationship with clients moving forward. A recent Spectrem study on the affluent found that only 30% of the clients polled felt advisors did a good job through the market turmoil. What’s more, a recent Cerulli study polling advisors on how the market environment is affecting their clients’ retirement plans found that 67% of advisors said their clients were postponing retirement, while another 57% said their clients were still planning on retiring at the same age, but had lower expectations for their lifestyle during retirement.

As for the kind of retirement planning help they need from the Obama Administration and elsewhere, a survey conducted in January (Schwab will release full survey findings in March) among 1,200 Schwab Advisor Services’ RIAs found no lack of suggestions (see table below).

No matter how an advisor’s clients have fared during the market upheaval, it’s crucial that advisors maintain contact with them. A recent poll performed by Russell Investments found that “advisors that are connecting with their clients, that are proactive and calling them and getting them to come in, are by far doing the best,” says Tim Noonan, managing director for private client services at Russell. “Don’t hide from your clients,” he counsels. Advisors who hide from their clients, he says, “are the ones that have suffered the most client defections and are least able to keep their clients invested. So either their clients will radically reduce their exposure to risk assets or go to cash completely. In either case, depending on the client circumstances, that may not be the smartest thing to do.”

After facing such steep losses, there’s no doubt that retirees are “going to peel back the onion and ask the hard questions,” says Dan O’Toole, senior VP at Genworth Financial Wealth Management, such as “How are you designing this asset allocation? What investment vehicles are you utilizing?” Cerulli research performed in 2008 looking at the types of retirement income products advisors used found that, by a wide margin, advisors stuck with more simplistic strategies of dividend-paying stocks or mutual funds and systematic withdrawals from mutual funds (see chart below). Annuitization and guaranteed living benefits and annuities ranked much lower in popularity.

Russell’s Noonan says that while there will be a ton of new products moving forward to address retirement income, with some being quite innovative, he opines that “advisors need another product like they need another navel.” Products oriented to producing “reliable income streams are going to have a bigger place in the portfolio, if for no other reason than that will be the central purpose of the planning discussion with the end client,” Noonan says. The key, he believes, will be for advisors to build a relationship with clients “that’s based on a very objective and clear need, and figuring out how to match that need with assets with the minimum amount of risk, rather than talking their clients into the maximum amount of tolerable risk.” Regardless of performance, advisors are making sure to revisit clients’ retirement plans. “Even though the portfolio is down,” says Schneider of Practical Perspectives, advisors are taking clients “back to why they invested, what they want to do in life. In most cases they can [still achieve their retirement goals] if they make some careful choices in the near term.”

Noonan says clients are relying on advisors to bring them “back to a position of confidence,” not to wallow together in despair. To that end, Russell recently launched a Web site called (, which is designed exclusively to assist advisors in creating a constructive dialogue with their clients. The site provides “tools and scripts and an advice framework to allow advisors to have a conversation with confidence with their clients again,” Noonan says. “Most investors left to their own devices without an experienced advisor don’t do the right thing when markets go sideways, and they did it again last year,” he says. “The biggest outflows in equities last year coincided with the third week in November, the market bottom.”

Redefining Your Value to the Client

To be sure, those advisors who helped their clients weather the market downturn without getting clobbered and who’ve created a more holistic relationship with their clients will be able to hang onto existing clients and compete more effectively for new ones. Going forward, advisors are going to have to broaden their service offerings to satisfy clients, predicts Gallant of GDC Research. Clients are now asking, according to Gallant, “What is the value of the advisor?” He says clients are looking for a broader array of services, “and given the [Bernie] Madoff scheme, I think there’s going to be a lot more scrutiny” from clients and prospects.

So for advisors to convey their value to clients, Gallant believes they will need to address a wider range of retirement issues including longevity, wealth transfer, and income.

The challenge for advisors whose client portfolios have seriously underperformed will be to ask themselves where they go from here, and for many, the answer may be to actually stop doing asset management, Gallant says. “Some will say it’s become too complex and they don’t have the time or expertise” and will outsource that function, he argues, while others will expand their asset management capabilities. “It goes back and forth.”

Genworth’s O’Toole agrees that advisors will have to redefine their value proposition. “Is it money management, retirement planning, wealth management? When you get into a market like today’s,” he says, clients will want to know “how many PhDs, MBAs, and CFPs do you have on staff? What’s the historical basis for making these decisions? What kind of research are you applying today to help me manage my money going forward?” Advisors are asking themselves whether they want to make those decisions themselves or with a committed staff or whether they should expand their resources and outsource. “Advisors are faced with lower profitability, lower revenue, and lower AUM, and in order to run their businesses they’re going to have to hope the market comes back or they’re going to have to find new clients. That becomes a heavy burden on an advisory firm: to be managing the money, providing the financial planning and retirement planning, and then also going out and creating new relationships.”

Regardless of how their pre-retiree and retiree clients have fared through the market gyrations, every advisor wants to put their best foot forward and help their clients navigate what’s going to be a tougher road to retirement. The bottom-line reality, says Gallant, is that there will be many advisors “who probably won’t be around given the performances of their portfolios,” while others will “reinvent themselves.”

E-mail Washington Bureau Chief Melanie Waddell at [email protected].


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.