RIAs must pivot or face ‘certain decline’

Phil was no longer surprised by the substantial amounts of investable assets that some constrained investors control. It really hit home early when his biggest clients, Brad and Michelle, who have $12 million with Phil, said they needed an income of $48,000/month. With an income-to-asset ratio of 4.8%, Phil realized that even Brad and Michelle needed an income plan that prioritized risk mitigation.

Income to assets ratio

The income-to-asset ratio provides a simple method for determining whether 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 percentage obtained is 3% or more, the person is a constrained investor.

What does this mean in practice? Caution. Never forget that constrained investors are unconditionally dependent on their savings to produce “much-needed” retirement income. They have little to no room for error in terms of investment errors, so they need a framework that imposes investment discipline.

Constrained investors’ planning framework, which combines safe and continuous monthly paychecks with long-term equity exposure, allows them to remain fully invested in all market conditions.

Let’s say Molly, a 66-year-old recently retired widow, has savings totaling $1,325,000. She needs $5,000 a month to top up Social Security.

  • Molly needs her savings to produce: $5,000 x 12, or $60,000 per year
  • Annual income required ÷ Total assets available to produce income = %
  • $60,000 ÷ $1,325,000 = 0.0452, or 4.52%
  • 4.52% is greater than 3%, making Molly a constrained investor

In advising Molly, the advisor’s first priority is to mitigate the risks that can reduce or even eliminate her retirement income. Two overriding risks that RIAs should not ignore when working with constrained investors are timing risk and longevity risk.

Never overlook the risk of synchronization

The income-destroying potential of timing risk is devastating for retirees whose unlucky timing of retirement proves catastrophic to their ability to generate income. Here is an example :

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

To demonstrate the danger to a retiree’s income, rather than retiring all 10 on the same day, we will separate them by a calendar quarter. Approximately every 90 days, another person will retire in this order: January 1, April 1, July 1, etc., until all 10 people are retired. We will use a two-year historical period, from 1968 to 1970, and actual market values.

Assume the portfolio has an asset allocation of 42.5% large company stocks, 17.5% small company stocks and 40% mid-term government bonds and is rebalanced annually. The individual retiree withdrew the same amount in each calendar year and adjusted annually for the inflation rate of the previous calendar year. The cost of funds in the portfolio is 100 basis points per year.

Ben is retiring on January 1. Three months later, on April 1, Susan follows Ben into retirement. Would you believe that a 3 month difference results in Susan ending up with nearly a million dollars more than Ben?

But it’s even worse for Kathy, the fifth person to retire, it’s a case of “wallet ruin”, not money. No income. Just bad luck. However, the 10and retiree, Jerry, got lucky. He received 30 years of inflation-adjusted income plus cash equal to $2.6 million.

They started off evenly. Jerry is rich. Kathy is broke. The lesson is that when working with constrained investors, RIAs cannot fail to mitigate timing risk.

Mandatory: Protection against longevity risk

Financially, nothing is more important to a retiree than their income. Economist and Nobel laureate Robert C. Merton said, “In retirement, your income, not your wealth, creates your standard of living. Think about it.

I like to say, “No retiree ceases to need an income.

Let’s go back to the example of our constrained investor, Molly. She’s a woman who knows something about living long into retirement. Molly’s mother died at the age of 95. Staying financially secure in her old age is a concern that is always on Molly’s mind.

At 66, Molly is healthy and vibrant. Do you agree that Molly could outlive her mother, say, six years? Certainly. This means that Molly would need you to support her monthly income until she turns 101. There is only one financial instrument that will provide guaranteed income for life. You know what it is.

Annuities and you: a settling of accounts

RIAs that continue to refuse to recommend life annuities should simply give up hope of keeping all of their Constrained Investor clients, let alone a realistic chance of attracting new ones.

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

Today, it is easy for RIAs to access annuities without commission or surrender charges in a wide range of contract structures. In addition, these annuities align with the RIA business model. Their values ​​relate to your portfolio management system, like any “wrapped” investment. As tools capable of introducing a risk-mitigating dynamic into the overall retirement income investment strategy, annuities are invaluable.

An annuity recommendation is not required to mitigate schedule risk. Use only capital risk-free investments to secure the client’s income in the first 10 years of retirement. That said, a combination of a single-premium immediate annuity and a guaranteed multi-year annuity is a simple, foolproof solution to managing schedule risk, which offers 120 months of guaranteed paychecks.

Customers love it. Providing predictable monthly paychecks is an integral part of establishing an investment discipline framework that keeps clients fully invested.

In terms of recommending annuities, longevity risk is another matter. There are no options here. When working with constrained investors who have at least a normal life expectancy, RIAs are violating their fiduciary if they refuse to recommend lifetime guaranteed income.

It’s time to move on, RIA. With this type of client, you can’t ignore the most important retirement income security tool ever created. As I said above, no-fee/no-commission annuities are readily available.

How to ensure the growth of RIAs

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

Retirement income planning is just as sensitive to asset allocation as it is to product allocation. The techniques and knowledge it requires are different from those used to accumulate assets. The negative effect of investment losses in the distribution phase are orders of magnitude more severe.

With nearly the entire RIA channel misaligned to meet market needs, I say something has to give. If you want to spark robust growth in your practice via the lucrative retirement income planning market, what should “give” is:

  1. False confidence in trust rates,
  2. Reluctance to recommend annuities offering guaranteed income for life,
  3. Investment strategies that fail to promote sustainable investment discipline through the provision of safe and secure monthly paychecks
  4. SWP in the context of constrained investor income planning.

I have seen countless examples of income distribution specialists diverting clients and assets from accumulation-focused advisors. This trend is accelerating due to the impact of baby boomer age women taking control of most wealth assets.

Right now, supply and demand do not match. Change that. The constrained investor is key to aligning your supply with market demand. It’s the path to a business future that offers personal fulfillment, increased customer satisfaction and substantial financial rewards.


David Macchia, MBA, RMA, CBBP, is an author, 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 launched Women And Income, a retirement income planning solution developed specifically for female boomer-age investors.

Comments are closed.