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Next phase in the fiduciary saga

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Earlier this week, I outlined reasons that the DoL fiduciary rule could be viewed as having a silver lining for financial advisers. And now, here are five actionable steps that you should consider, a roadmap to make sure you stay on track and benefit from the new rule.

1. Play the title game to strengthen your Income planning skill
The Wall Street Journal advised its readers who are nearing retirement to seek out advisers who have one of the “big three" income-planning professional designations: The Retirement Management Analyst (RMA) from the Retirement Income industry Association; Retirement Income Certified Professional (RICP) from the American College; or Certified Retirement Counselor (CRC) from InFre.

These designations help you move past probability-based thinking in favor of outcome-based thinking, a hugely important differentiation when working with the large segment of clients whose primary concern is stable, monthly income.

2. Work with “constrained” investors
“Constrained” investors represent a lucrative market. Historically, we tend to segment clients by AUM. These traditional segmentation approaches are fine for the accumulation phase but they are insufficient for retirement income.

Several years ago the Retirement Income Industry Association developed a three-part segmentation ladder based on a client’s withdrawal rate. So if they have $1 million in assets, and withdrawal $5,000 per month, they have a 6% annual withdrawal rate. This allows us to categorize any retiree in one of these three segments:

● Underfunded investors, greater than 7%
● Constrained investors, 3.5% to 7%
● Overfunded investors, less than 3.5%

Overfunded investors are among the lucky minority whose asset base is greater than what’s required to generate their desired monthly income. Underfunded investors tend not to be good prospects for investment consultants. They generally have small amounts of savings and will rely upon Social Security as their primary source of retirement income. We may see robo advisory firms address this segment with new retirement income offerings.

“Constrained” investors represent a multi-trillion market that any adviser would be wise to focus on. These are clients who reach retirement with savings, but not a substantial amount compared to the monthly income they want to generate.

These investors have reached a point in life where they have little room for investment error. It’s essential that they use safe investments that provide income which is certain over the early years of retirement. The predictable monthly paychecks emotionally bind the client to the income strategy making it easier to remain invested in risky assets over long periods of time.

3. Focus on risks (in plain language)
As we mentioned in our first installment, the DoL rule is all about costs. I wish it were more about risks. Clients generally, and constrained investors in particular, face a variety of risks in retirement, any one of which can decimate their financial security. Here at Wealth2k, we focus on three big risks that can be mitigated. The first is sequence-of-return risk, which to a client we would refer to as, “What if I pick a bad year to retire risk?” Inflation risk is the second, otherwise stated as, “Will my income keep pace with rising prices risk?” And, third, longevity risk, or “Will my income last for my entire lifetime risk?” Framing these three big risks in this was will help you convey more clearly to clients the urgency to take steps to mitigate their harmful effects.

4. Commit to a process and learn it inside-out
I believe that DoL makes it essential for bank programs to institutionalize their process for retirement income. For multiple reasons, including an imperative to limit financial liability potential, standardization of process is a necessity. In the pre-DoL world, two clients of the same age, same amount of investible assets, identical risk tolerances and the same income needs could come away from their planning meetings with two very different outcomes. The variability in retirees’ planning outcomes can’t work in the post-DoL world.

5. Talk-up 'floor' and upside
Clients already come to the planning meeting with a floor. It’s Social Security. But depending upon the client’s tolerance for variability in his or her monthly income, the floor will often need to be expanded by selecting products that provide predictable monthly income. Typically, this is achieved by selecting an annuity, either an immediate of deferred income annuity, or a variable or fixed indexed annuity that includes an income rider.

People have strong feelings about annuities, both pro and con. But the decision to select one or not should be based on need, not dogma. I see the decision to select an annuity as more of a moral than an economic matter; advisers have a moral obligation to deliver the income strategy that most appropriately suits the investor’s needs.

This gets back to my earlier point about the DoL being cost-focused. It makes me wonder what an adviser's fiduciary duty really means when he or she is working with retirees who need to turn assets into income. Will fiduciary duty turn on providing the lowest cost investments? Or will it be more centered on mitigating the critical risks that can so easily damage the retiree’s financial future? Here’s hoping that risks become the main focus.

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