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Retirement Planning > Retirement Investing

RIAs Must Pivot or Face 'Certain Decline'

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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.

Phil was no longer surprised by the substantial amounts of investable assets that some Constrained Investors control. This really hit home early when his biggest clients, Brad, and Michelle, who have $12 million with Phil, stated that they need income of $48,000/month. With an Income-to Assets ratio of 4.8%, Phil realized that even Brad and Michelle needed an income plan that prioritizes risk mitigation.

Income-to-Assets Ratio

 The income-to-assets ratio provides an uncomplicated method to determine if an individual is a Constrained Investor. Simply divide the annual income to be produced by savings by the total amount of savings available to produce income. If the resulting percentage is 3% or more, the individual is a Constrained Investor.

What does that mean in practice? Caution. Never forget that Constrained Investors have an unconditional reliance upon their savings to produce “must have” retirement income. They have little or no margin for error in terms of making investing mistakes, thus they need a framework that imposes investment discipline.

The Constrained Investor planning framework, which combines continuing safe monthly paychecks with long-range exposure to equities, enables them to remain fully invested through all market conditions.

Let’s say Molly, a 66-year-old widow and recent retiree, has savings totaling $1,325,000. She requires $5,000 per month to supplement Social Security.

  • Molly needs her saving to produce: $5,000 x 12, or $60,000 annually
  • Required Annual Income ÷ Total Assets Available to Produce Income = %
  • $60,000 ÷ $1,325,000 = .0452, or, 4.52%
  • 4.52% is greater than 3%, making Molly a Constrained Investor

In counseling Molly, the advisor’s first priority is to mitigate risks that can reduce or even eliminate her retirement income. Two paramount risks that RIAs must not ignore when working with Constrained Investors are timing risk and longevity risk.

Never Neglect Timing Risk

The income-destroying potential of timing risk is devastating to retirees whose unlucky choice in the timing of retirement proves catastrophic to their income generation capacity. Here’s an example:

Imagine 10 financially identical people. All have the same savings of $500,000. They have identical investment portfolios. They will retire and withdraw the same amounts of income. What is different? Only the timing of retirement.

To demonstrate the danger to a retiree’s income, rather than retire all 10 the same day, we will separate them by one calendar quarter. About every 90-days, another individual will retire in this sequence: Jan 1, Apr 1, Jul 1, and so on, until all 10 are retired. We will use an historical two-year period, from 1968 to 1970, and actual market values.

Let’s assume the portfolio has an asset allocation of 42.5% large company stocks, 17.5% small company stocks, and 40% intermediate-term government bonds and is rebalanced annually. The individual retiree withdrew the same dollar amount within each calendar year and adjusted annually for the prior calendar year’s inflation rate. The cost of funds in the portfolio is 100 bps annually.

Ben retires first on Jan. 1. Three months later, on April 1, Susan follows Ben into retirement. Would you believe that a 3-month difference causes Susan to end up with nearly $1million more than Ben?

But it’s even worse for Kathy, the fifth person to retire, is a case of  “portfolio ruin,” No money. No income. Just bad luck. However, the 10th retiree, Jerry, was lucky. He received 30-years of inflation adjusted income plus a pile of cash equal to $2.6 million.

They started equally. Jerry is rich. Kathy is broke. The lesson is, when working with Constrained Investors, RIAs cannot fail to mitigate timing risk

Mandatory: Longevity Risk Protection

Financially, nothing is more important to a retiree than his or her income. Economist and Nobel Laureate, Robert C. Merton, said: “In retirement, it’s your income, not your wealth, that creates your standard-of-living.” Think about that.

I like to say, “No retiree stops needing income.”

Let’s go back to the example of our Constrained Investor, Molly. This is a woman who knows something about living a long time in retirement. Molly’s mom passed away at age 95. Remaining financially secure in her old age is a concern that is always in the back of Molly’s mind.

At age 66, Molly is healthy and vibrant. Do you agree that Molly could outlive her mom by, say, six years? Certainly. This means that Molly would need you to provide for her monthly income to last until her age 101. There’s only one financial instrument that will provide lifetime, guaranteed income. You know what it is.

Annuities and You: A Reckoning

RIAs who continue to refuse to recommend lifetime income annuities should just give up any hope of keeping all their Constrained Investor clients, not to mention having any realistic chance of  attracting new ones.

I make this statement for two reasons. First, the “Ken Fisher” type of condemnation, criticism, slur, complaint, objection, and grievance against annuities has been rendered moot.

Today, it is easy for RIAs to access no-commission/no surrender charge annuities across a wide range of contract structures. Moreover, these annuities harmonize with the RIA business model. Their values report into your portfolio management system, no different than any “wrapped” investment. As tools able to introduce risk mitigation dynamics into the larger retirement income investing strategy, annuities are invaluable.

An annuity recommendation is not required to mitigate timing risk. Just use investments with no principal risk to provide the client’s income over the first 10 years of retirement. That said, a single premium immediate annuity/multi-year guaranteed annuity combo is an easy and bullet proof solution for managing timing risk, one that delivers 120- months of guaranteed paychecks.

Clients love this. Providing predictable monthly paychecks is integral to building a framework for investment discipline that keeps clients fully invested.

In terms of the recommendation of annuities, longevity risk is another matter. There is no optionality here. When working with Constrained Investors who have at least a normal life expectancy, RIAs breach their fiduciary if they refuse to recommend guaranteed lifetime income.

Time to move forward, RIAs. With this type of client, you cannot ignore the most important retirement income security tool ever created, As I said above, no load/no commission annuities are easily accessible.

How to Assure RIA Growth

I realized early in my career that “distribution”  was a distinct planning specialty and not a simple reversal of dollar cost averaging.

Retirement income planning is equally sensitive to asset allocation and product allocation. The techniques and insights it demands are different than those used to accumulate assets. The negative effect of  investment losses in the distribution phase are orders of magnitude more serious.

With virtually the entire RIA channel misaligned to meet the market need, I say something has to give. If you wish to ignite robust growth in your practice via the lucrative market for retirement income planning, what should ”give” is:

  1. False confidence in confidence rates,
  2. Reluctance to recommend annuities that provide lifetime guaranteed income,
  3. Investment strategies that fail to promote durable investment discipline through the provision of safe monthly paychecks and
  4. SWP in the context of Constrained Investors’ income planning.

I’ve seen an enormous number of examples of income distribution specialists taking clients and assets away from accumulation-focused advisors. This trend is accelerating due to the impact of boomer-aged women gaining control of most wealth assets.

Right now, supply and demand are mismatched. Change that. Constrained Investor is key to aligning your supply with the market demand. It is the path to a business future that delivers personal fulfillment, increased client satisfaction and substantial financial rewards.


David Macchia, MBA, RMA, CBBP, is an author, public speaker, and entrepreneur. He is the founder of Wealth2k Inc, and the developer of the widely used retirement income solution, The Income for Life Model. David recently introduced Women And Income, a retirement income planning solution developed expressly for boomer-aged women investors.