Two veteran advisers reflect on more
than 35 years of managing retirees' assets and expectations.
I usually set aside
Labor Day for reflection, not just about the official end of summer, but about
broader topics that I encounter as a columnist for InvestmentNews. So
I was thrilled when two veteran financial advisers I admire — Phil Lubinski and
Paul Reasoner — agreed to share the wisdom they've gained from working with
hundreds of clients over the past 35 years to create and manage retirement
income plans that have stood the test of time.
With millions of
baby boomers moving into retirement with trillions of dollars of assets that
need to be converted into income, the opportunity has
never been bigger for the financial services industry. But this
opportunity presents its own challenges.
"Clearly the
most significant problem facing both clients and advisers is the lack of
certainty of the distribution strategy of an income portfolio," said Mr.
Reasoner, founder of Compass Wealth Advisor in Elkhart, Ind. , and creator of
the Tiered Retirement Income System, which he has used for his clients and his
personal assets since 2004. In 2014, when he was 70, Mr. Reasoner
sold his practice to a transition partner.
"Many advisers
simply rely on accumulation strategies and hope that they work for income
portfolios," he said. But the painful bear markets of
2000-2002 and 2007-2009 "should have taught us that strategies used to
accumulate long-term wealth cannot be automatically transferred to apply to
distribution strategies."
Mr. Reason uses a
time-segmentation strategy, breaking income portfolios into three tiers based
on their function.
The first tier,
income insurance, holds liquid and guaranteed assets, such as money-market
funds and CDs, that entail no risk of principal loss, for a short period of
time, up to five years. The second tier is dedicated to income production
through assets such as bonds, preferred stocks, high-dividend stocks or fixed
annuities, which provide relatively high certainty of consistent income and
principal conservation over longer time horizons. The third tier is allocated
to growth investments, balancing risk of capital with potentially higher
returns.
"While no one
can structure a retirement income portfolio which uses equities as a driving
component that will not experience down years, there are techniques which may
mitigate both the real and psychological damage done by negative volatility," Mr.
Reasoner said. "Getting clients to focus on the cash income from their
portfolio and having a strategy in place which anticipates negative volatility
and assures the client several years of targeted cash flow will usually allow
the portfolio to recover and grow in the future by not being forced to sell the
golden goose which produces the egg."
Mr. Lubinski,
co-founder and head of retirement income strategy for WealthConductor, has been
developing income distribution software tools since the 1990s based on more
than three decades of experience with the clients of his Denver-based wealth
advisory firm. IncomeConductor is a cloud-based software program designed for
advisers seeking to build and manage holistic, time-segmented income plans for
their clients.
"Having worked
with retirees for the past 35 years, I have come to appreciate what their needs
are during their journey through the different phases of retirement," Mr.
Lubinski said.
"Retirees will
become much more dependent on their advisers as they age and begin to have
diminished financial acumen," he said. "The advisers' value
proposition to their clients must transition from asset manager to plan
manager."
Mr. Lubinski
recently published a white paper, Meeting Retirees' Expectations:
Providing Effective Retirement Income Advisory Services, about
the issues and situations retirees encounter and guidance for advisers on how
to best meet their expectations.
While Mr. Lubinski
stresses the importance of creating retirement income plans covering short-,
intermediate- and long-term needs, he warns about the dangers of being too
precise. "To predict the exact spending needs of retirees over long period
of time is an exercise in futility. At best, we are creating a blurry baseline
that provides us a guideline to measure future changes against."
"The segmented
or bucket strategy that I first developed in 1984 turned out to not only be
intuitive to my retiring clients but much easier to modify along the way as
their journey played out," he added.
When Mr. Lubinski
retired in 2014, he received about 200 notes from his clients thanking him for
giving them to permission to retire and permission to spend their money, for
helping them think through difficult decisions and for bringing a transition
partner into his practice.
"Not a single
client thanked me for creating a meticulously detailed initial analysis, nor
for creative a bulletproof tax strategy, nor for my scrutiny of investment
products," he said. "Despite this feedback, I still see so many
advisers focusing on the wrong things."
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