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March 20, 2022 at 10:59 AM
What You Need to Know
- With $30 trillion of money in motion, this is no time to be overly confident; instead, consider a new approach to retirement income planning.
When there is a supply-demand mismatch on the scale of one that is now building, disruption is inevitable. The market demand will look for alternative sources of supply to meet its needs.
Alternatively, the source of supply may change in ways that enable it to meet the demand. In wealth management, a demand is building on a scale never before seen. A tsunami of money will be looking to be managed, but, and this is critical, not in the manner that RIAs are typically proficient at. This is a problem.
“By 2030, American women are expected to control much of the $30 trillion in financial assets that baby boomers will possess — a potential wealth transfer of such magnitude that it approaches the annual GDP of the United States,” according to McKinsey & Company.
Money in motion on this scale makes for grand opportunity, or certain decline. To the “stereotypical RIA” here’s a warning: This is no time to be sanguine.
Two scenarios can happen: RIAs will suffer progressive business decline due to accelerating losses of existing retiree clients combined with a sub-optimal capacity to attract new retiree investors, including female boomers, or will they will attract these new clients and grow.
Currently the odds favor decline. Although this may sound like heresy, here’s why:
A constellation of factors create the conditions for assets moving away from RIAs. These include the trillions of dollars more transitioning to the control of women, age-related financial needs and preferences, unmanaged threats to retirement security, increasing economic uncertainty, a dangerous, sub-optimal planning process and entrenched biases.
This is not to say that the growth scenario isn’t possible. It is. However, its realization is conditional upon RIAs adopting an open mindedness and new worldview as it pertains to how best to execute on the mother of all business opportunities: retirement income distribution planning,
Two supreme forces, one gender, and one monumental planning need, will directionally influence which way trillions of dollars of wealth assets flow.
The RIA channel is the most dynamic, fastest growing, most technologically advanced and most sought after by all flavors of product manufacturers. It is also the channel least prepared to address the income planning needs of millions of retiree investors.
The channel has been immeasurably buoyed by the unprecedented 14-year period of appreciating asset prices that was propelled by a hyper-colossal expansion of credit.
More recently, however, economic uncertainty is rising, stock prices are falling, inflation is surging, and the Fed is signaling tightening. We still don’t know the impact of Russia’s invasion of Ukraine. One thing we can count on, however, is that demographics are unstoppable.
Women are the future of wealth management. It’s not just the scale of assets they will control, an amount roughly equal to 575% of the current RIA channel, it’s more that they’re unhappy with you, male advisors.
The money-in-motion ignited by the passing of husbands puts control of assets and sole decision-making power in women’s hands. In 70% of instances following her husband’s passing, the woman’s first consequential solo investment decision is to fire the incumbent male advisor.
Sub-Optimal Income Planning
The RIA channel’s overarching competency and worldview are investment accumulation-focused, a mismatch for the nature of income planning that most retirees need.
Among RIAs, the systematic withdrawal plan (SWP) continues to serve as the default methodology for providing retirement income. If I had the power to do so, I would ban SWP for most investors. My criticism of systematic withdrawals is not with SWP, per se. SWP works perfectly well within the abstraction of a computer simulation.
Rather, my perspective is informed by the countless real-world examples I’ve seen of investors not being able to stick with the strategy when markets become volatile or are nosediving. The long bull market has camouflaged many income planning sins. Most, I predict, will be exposed.
Unless advisors act to limit their retirees’ risk exposures, I believe that many clients will eventually suffer grievous damage to their retirement security. This inevitably will cause blowback that ensnarls some advisors in litigation.
Here are two events from 2009 that are seared into my memory. That February, I chaired an advisor conference in Boston sponsored by the Retirement Income Industry Association. We were all still reeling from the 2008 economic catastrophe. Some of the advisors in attendance were more than a little emotionally “beaten up.”
A New Jersey-based RIA approached me after the end of a session. Welling up with emotion, he confessed to feeling guilty that, at the worst possible time, he was unable to prevent several of his oldest and closest retired clients from selling out of their SWP strategies. The advisor understood that the tragic outcome for his clients was a permanent reduction in their standard-of-living. “I came here to learn how to do it differently,” he stated.
Later in 2009, Securities America held a conference for its advisors. (Securities America is now part of Advisor Group). One of the conference sessions featured a panel of advisors who had adopted the firm’s time-segmented retirement income strategy.
These advisors related their stories of talking their clients through the crisis, and, owing to the structure of the time-segmented strategy, being able to keep 100% of their clients fully invested.
Constrained Investor
After 18 years in the retirement income distribution business, I’ve found the income planning construct of the “Constrained Investor” to be the most important, most practical, most tangibly valuable, and, importantly, the most attractive to clients. It’s less an investing methodology than it is a whole new way to think about and serve the income planning needs of the largest segment of retirees.
If the Constrained Investor becomes widely adopted in the RIA channel, it guarantees growth. It redefines client segmentation in a way that is relevant to retirement income distribution planning. It introduces three categories of investors. Any client or prospect has a place in one of these three categories:
“Overfunded” Investors are highly attractive prospects. Their surplus of cash relative to their income requirement means that any investing methodology for generating retirement income works fine. SWP is perfectly appropriate.
My work involves improving income planning for Constrained Investors, the majority of Americans who have saved consistently for retirement. While Constrained Investors get to retirement with savings, the amount they’ve saved is not high compared to the level of income they require to fund a minimally acceptable lifestyle.
It’s the critical relationship between the level of investable assets and the income requirement that both differentiates Constrained Investors and redefines their planning needs. Collectively, they control trillions of dollars in wealth assets and are a highly attractive type of client.
Mitigating risks that can reduce or even vaporize the Constrained Investor’s retirement income is the advisor’s chief planning priority. Here is where you are forced to bid adieu to SWP. There’s no other choice lest you risk the legal liability associated with what amounts to income planning malpractice.
All Constrained Investors have investible assets. On average, expect them to give you $1.3 million to manage. But sometimes they have much more. Case in point: Phil, an RIA who made a successful and very lucrative conversion into Constrained Investor income distribution planning.
