What The Latest Milestone Actually Means

What The Latest Milestone Actually Means

Today, marks the applicability date of the Impartial Conduct Standards under the Department of Labor’s fiduciary rule, a process that was almost 6 years in the making (although technically the rule doesn’t take effect until 11:59PM tonight!). Notably, though, the primary part of the fiduciary rule that is taking effect is just the Impartial Conduct Standards that financial advisors must act as fiduciaries (at least regarding retirement accounts); the additional fiduciary agreements, policies and procedures requirements, and (website) disclosure rules, won’t kick in until January 1st of 2018.

However, financial institutions have already begun to send out information to clients about various changes that may be occurring under the fiduciary rule, as many firms have already been implementing changes just to ensure they comply with the Impartial Conduct Standards (and some have been making announcements today). In the meantime, though, the fiduciary rule is still not a done deal, even though the Impartial Conduct Standards are applicable today, as House Republicans just included a proposal to repeal of the DoL fiduciary rule in the new Financial Choice Act (though it doesn’t appear to stand much chance of passing the Senate as-is), a similar piece of legislation was just proposed in the Senate (though it too is still subject to a Democratic filibuster), and OMB just posted a notice that the Labor Department will soon be soliciting public comments about potential modifications to the rule.

Still, the odds of a full repeal seem low, though there is much discussion about whether the rule might at least be changed, particularly with respect to the controversial class action lawsuit provision (which some claim will raises costs, and others suggest are an essential point of accountability to ensure financial institutions take the rules seriously), though some have also warned that the disclosure requirements may still be problematic for some advisory firms (e.g., RIAs that do not qualify for the level-fee fiduciary streamlined exemption).

Nonetheless, the fact remains that the fiduciary rule is now official and on the books, and even though the Department of Labor itself has indicated it will not be aggressively enforcing through the end of the year as long as firms try to comply in good faith, the rule is already driving substantial positive changes in the industry, from simplification in mutual fund share classes with the rise of “T shares and clean shares” to new product filings that should expand the accessibility of various no-load insurance and annuity products to fee-based financial advisors. And all financial advisors should be certain that going forward, they have clear documentation in their client files, for every IRA rollover, that analyzes the costs and performance of the old plan against what the advisor proposed, to substantiate that the rollover really was the appropriate recommendation for the retirement investor!

7 Ways To Onboard Your New Clients & Become Super Referable

7 Ways To Onboard Your New Clients & Become Super Referable

While most advisors focus on trying to generate referrals from long-term satisfied clients, the reality is that it’s possible to start generating referrals by creating “wow” experiences for clients from the very first moment they say “yes” and begin the onboarding experience with the advisory firm. Which means it’s worth spending time thinking about and looking at how you onboard clients, and the kinds of first impressions you set. Some potential ways to improve the client onboarding experience include: 1) have other members of your team contact the new client to introduce themselves, by a phone call, a handwritten note, or even just stepping into the initial meeting when the client is in the office (which helps the client understand the depth of the team, how well they will be supported, and put a face and an initial relationship to the other people who the client will be interacting with in the future); 2) invite the new client to a client appreciation event (or even just take the new client to lunch, or a ball game or golf outing, or any other fun event to start building the “business friendship”); 3) consider creating an “expectations agreement” (i.e., client engagement standards), that helps to set out clear communication and service expectations with the client; 4) conduct a follow-up phone review the first time the client gets a statement with their new accounts, to help affirm that they understand everything and don’t have any questions or concerns); 5) send them a physical book (don’t underestimate the perceived value of something tangible!), either related to the work you do, or something related to their hobbies or interests (which helps to show them you were listening and they were heard!); 6) connect with them via social media; and 7) create a “welcome package” to celebrate their onboarding as a new client (which could include cookies or sweets, fun items for their children, gift cards or coupons, a card signed by your team, etc.) and help make the new client process a memorable experience.

Investment Wholesaling And Segmenting The Four Types Of Financial Advisors

Investment Wholesaling And Segmenting The Four Types Of Financial Advisors

Historically, different financial advisors operated different business models depending on their industry channel – RIAs managed investment portfolios, while wirehouses sold proprietary products and securities from their inventory, and independent broker-dealers sold third-party investment products. Accordingly, asset managers and product manufacturers aligned their investment wholesalers to those channels, with one for wirehouses, another for independent broker-dealers, and a third for the independent RIA community. The challenge, though, is that as the advisor value proposition evolves, along with industry business models, and the regulatory environment, the “traditional” industry channels are breaking down as a way to segment financial advisors!

In this post it will discuss from the investment wholesaler perspective, the four different types of financial advisors that have emerged, how they differ based on client approach and value proposition, and how wholesalers can best add value to these different types of advisors!

The key issue is to recognize that financial advisors tend to have fundamentally different ways in which we frame our own value proposition, and approach client situations, that are no longer necessarily defined by industry channel. And this matters, because when companies with their own wholesalers are trying to reach advisors, the ways in which an advisor approaches their clients and define their own value proposition heavily impacts what that advisor will and will not see as valuable from their wholesalers!

For instance, some advisors taking a very financial planning-centric approach to clients, while others are more investment-centric. And when it comes to delivering value to clients, some are more advice-centric, and others are more product-centric. Thee various combinations result in four categories of financial advisors: (1) fee-for-service financial planners; (2) investment managers; (3) needs-based sellers; and, (4) asset gatherers.

From the perspective of the wholesaler, it is crucial to recognize that each of these segments receives different value from a wholesaler, and demands different types of products and services. Because if an advisor is an asset gatherer, they are going to want to see a product that can easily help them gather assets… but if they are needs-based sellers, they will want planning strategies and sales ideas… and if they are an investment manager, they will want products that they can manage to demonstrate their own expertise (without outsourcing to other active managers!)… and if an advisor is a fee-for-service financial planner, they will want solutions that help them simplify investment management to free up time to service clients and focus on planning. Thus, investment managers (which might be an RIA or a Rep-As-PM at a broker-dealer) tend to use stocks, bonds, and ETFs, but asset gatherers (which might be RIA or at a broker-dealer) are more likely to use multiple TAMPs and SMA, and fee-for-service financial planners (usually RIAs) will typically just use one TAMP for all of their assets and be uninterested in individual investment products at all!

The bottom line, though, is simply to recognize that the whole advisory industry is in the midst of reorienting itself, and trying to segment financial advisors by wirehouse, broker-dealer, and RIA industry channel no longer works. Advisors are reinventing their value propositions and where they focus, while DoL fiduciary further forces firms to re-draw their lines and tech innovation accelerates these trends. Which means, if wholesalers want to reach financial advisors and add value to them, wholesalers need to pay attention to the four different types of financial advisors!

Tor a lot of big national asset managers, there’s a set of wholesalers for RIAs, there’s another set of wholesalers for independent broker-dealers, there’s maybe another set of wholesalers just to call on the wirehouses, and maybe there’s a separate national account or key accounts team that focuses on wholesaling to firms that centralize their investment offerings. Because, if I’m a registered rep at broker-dealer but I use the home office to design portfolios, it doesn’t really make any sense for the wholesaler to spend time with me as the rep. You’ve got to send someone from national accounts wholesaling to the home office if you want to get onto that platform.

But beyond just the different industry channels, I think we also have fundamentally different ways that we as advisors are now framing our own value propositions in approaching client situations. And it matters because so many investment firms now, I find, with their wholesalers, they’re trying to reach us as advisors, whether it’s firms looking to serve advisors outsourcing investment manager responsibilities, other tech firms and platforms serving us, and especially financial services product manufacturers trying to distribute products through us to our clients, the ways we approach our clients and define our value proposition really impacts what we do and don’t see as valuable from wholesalers. But when the wholesalers don’t recognize that, we get all these awkward mismatches that just don’t line up anymore with traditional industry channels.

Financial Planning Oriented vs Investment Oriented & Product-Centric Vs Advice-Centric

I’ll give you an example of this. Some financial advisors have a client approach that is very investment oriented. They approach clients as, “I’m here to help you invest your money.” So, the advisor might manage it themselves or maybe they buy mutual funds or maybe they outsource it to someone else, but they focus on portfolios.

By contrast, other advisors are very financial planning oriented in the approach. They lead with financial planning. Every client starts with a financial plan. They might produce the plan themselves, they might delegate it, they may use a third party firm or home office to help create it, but they view the financial planning as the primary approach and focus, and only secondarily do they then plug in investment products because at some point, even if you’re giving advice, the money’s got to land somewhere.

Now, a second way to think about advisors, is what we get paid for. Some of us get paid for our products and some of us get paid for our advice itself. So, an advice-centric financial advisor views their primary product value proposition usually as themselves. They see it as, “It’s my knowledge. It’s my expertise. The client pays me for my personal value.” That’s an advice-centric value proposition.

Now, for other advisors, they’re more product-centric. The primary value that they bring to the table is the quality of the products they provide. So, the job is to implement a financial services product, and the better products I have as a product-centric advisor, the more things I could sell, and the more things I can implement with clients. But the value isn’t me per se, the value is my ability to bring valuable products to the table, for my clients.

Four Types Of Financial Advisor Value Propositions

Here’s why this segmentation matters. Bear with me a moment. Think about this as like a two-dimensional grid. So, on the left side we’ve got financial planning-centric advisors, on the right side we have investment-centric advisors. And then across the top we have the advice-centric advisors, and across the bottom we have the product-centric advisors. So, we now kind of got this two-by-two grid where people line up in different categories.

The upper left would be financial planning oriented advisors that are advice-centric. This is the domain of those who offer a primarily fee for service financial planning. They focus on financial planning advice, the value is the person who gives the advice. It’s the advisor. So, this would include advisors that charge hourly, project, and retainer financial planning fees. I think it even includes a subset of advisors that maybe charge for assets under management, but in the end, the portfolio is not meant to be the value. It’s usually a very simple portfolio. Because the client isn’t really paying for the portfolio, they’re paying for financial planning advice, and maybe it just might be easier to bill a portfolio if they have assets anyways.

So, when we look at financial planning-centric advisors, we have a different grouping than the rest. And the interesting phenomenon is that I find they often span channels. Now, planning fee for service advisors tend to be independent RIAs or at least dual-registered, because I can’t actually get paid a fee under a broker-dealer form and I’ve got to have an RIA or a hybrid registration.

But here’s why it matters from the perspective of investment wholesalers that come at us. When we’re financial planning-centric, we tend to outsource our investments. For instance, these are the RIAs that use TAMPs, because the advisor’s value proposition isn’t focused on the investments, it’s focused on the financial planning. They’re often quite comfortable to delegate the non-essential investment process to a TAMP. And many advisors that are planning centric, they just kind of pick one TAMP for everything. Pnce you find a reasonable solution to plug in after you do the real planning stuff for clients, why bother with more?

Now, the upper right corner is different. These are the investment oriented advisors that are still advisor-centric. So, these are typically the advisors that view their primary value proposition as their ability to implement quality investments for clients. Now, the key distinction here is the investment oriented advisor who is advice-centric doesn’t want to use products to implement. They don’t want to use actively managed funds, they don’t want to use separately managed accounts, they don’t want to use TAMPS. Their investment ideas, their strategies, their ability to pick the right investments, that’s their value as the advisor.

Again, this matters from the perspective of wholesalers who typically approach us, and particularly because this isn’t specific to a channel. There are RIAs who are investment oriented and advice-centric. They created the RIA to build portfolios for the clients, but there are also registered reps and broker-dealers who did the same thing. It’s even got a label now. It’s called Rep-as-PM, which is short for rep as portfolio manager, because as the name implies, it’s the rep who’s trying to create the value for clients by being the portfolio manager.

Which is important because if you’re a wholesaler and I’m an investment oriented advice-centric advisor and you come at me with actively managed funds, SMAs, and a TAMP, you’re wasting your time. Whether I’m an RIA or a Rep-as-PM or at a broker-dealer, I’m not investing with your solutions because I’m going to do it myself, because that’s my value.

And I think this is actually where ETFs are shining right now. For a lot of investment-oriented advisors, we don’t necessarily have time to do individual stock analysis. Though some may have a stock picking process or they grew large enough to hire an investment team to help, it’s certainly not all advisors.

For a lot of advisors that are in this investment oriented category, ETFs are just an easier building block to manage than individual stocks. And so, the investment oriented advisor often then ends up using ETFs. But here’s a key point to it. It’s not that the investment oriented advisor is buying ETFs because they’re going passive. They’re actively managing the ETFs.

But because the advisor says their value proposition is actively managing the ETFs, this is why even with all the growth of ETFs, I’m incredibly negative about actively managed ETFs. Because I think the investment product manufacturers have missed that the advisors who are using ETFs and managing them in their portfolios, it’s because the advisor wants to be the one adding value. I don’t want to hire some other active manager because then the client’s going to say, “What do I need you for? I could have bought the active fund directly.” The advisor says, “This is my value,” so they’re not going to adopt actively managed ETFs they’re not going to adopt actively managed mutual funds, they’re not going to adopt SMAs, and they’re not going to adopt TAMPs, because they build the portfolios themselves. But again, this isn’t specific to industry channels. This can be Rep-as-PM at a broker-dealer, or this can be a particular subset of independent RIAs that say investments are their value proposition.

The lower right corner is the third group. These are the investment oriented folks, because we’re still on the right, but product-centric because we’re across the bottom now of our little two-by-two grid. For these advisors, they may be focused on implementing investments, but their value isn’t meant to be hands-on management of the portfolio. It’s their ability to find good products, good third party managers, and bring those solutions to the table for their clients. This is where you see actively managed mutual funds, or maybe in the future, actively managed ETFs. This could be a series of separately managed accounts, this could be a TAMP, or several TAMPs.

And in fact, one of the key points of investment-oriented but product centric advisors is that they often use a pretty wide range of solutions. So, if the client wants a bond manager, they’ll get a bond manager. If the client wants a socially responsible investing approach, they’ll find a TAMP or an SMA to build it. If the client wants a certain portfolio, they’ll find a manager or bring it to the table. Because if they’re really trying to build a scalable business, they may eventually simplify that down to a couple of core providers, the go-to products that I know work, that I know I can sell my clients on, that they’re persuaded by.

But for the investment oriented product-centric advisor (and this is where most investment sales people really live), they function more like asset gatherers. Their goal is just to gather assets. I’ll gather assets into actively managed mutual funds, or SMAs, or TAMPs, whatever it takes. I’m just trying to gather assets, sell products, bring in dollars, and might use a wide range of solutions to do it.

But here again, asset gatherers exist across channels. There are RIAs that are very focused on asset gathering, they might use one or multiple TAMPs to collect assets. There are registered reps at broker-dealers that focus on asset gathering and might use a wide array of funds and SMAs and TAMPs in their platform. You know, whatever it takes to gather assets, they’ll find a product to fill the void.

But from the wholesaling perspective, this is a very different type of advisor. This is the advisor where you can give them products to check out and try to get a share of their wallet, or clients’ wallets, with that product. But you have to show them how to sell it, like what’s the pitch? How is it different and better than the products that they currently pitch? That doesn’t work for investment oriented firms that are advice-centric because the advisor says, “No, no, I’m the gatekeeper that picks the stuff. I don’t sell the stuff.” That’s the key difference between advice oriented advisors, where the value proposition is me, and product oriented advisors. With advice oriented advisors, they tend to be a gatekeeper. With product oriented advisors, they tend to be a sales distribution channel.

Now, the bottom left, the fourth of our little two-by-two grid is the financial planning oriented but product-centric advisor. This is the classic domain of needs based selling. Advisors who lead with a financial plan, find out what clients need, and then just implement whatever product they need at the end. But the key point is that they lead with financial planning and then get paid for product implementation. This is the domain of planning oriented brokers and planning oriented insurance agents as well. They’ll do financial planning for the clients because that’s how they determine what’s appropriate to sell at the implementation phase. They don’t lead with the products. They don’t say like, “Hey, I’ve got this cool fund that you should check out.” They lead with, “I’m going to do some financial planning for you, but ultimately, the value at the end is…” and then I’m going to implement some products to solve whatever problems come up.

Because these advisors are product-centric and get paid for products, they are in practice most likely to be at broker-dealers. Because, historically, that’s where needs based selling essentially emerged, broker-dealers and insurance companies. Do the financial plan, implement the client needs at the end. You know, financial planning is a highly effective way to determine clients’ needs and then sell them whatever they need. We’ve proven this over several decades now.

But from the wholesaling perspective, this approach is a little bit different. Investment-oriented advisors who are product centric want product ideas they can pitch and sell. Financial planning oriented advisors who are still product centric want planning strategies, sales ideas that fit planning strategies. If you see a client with this situation, here’s a cool product we have that fits this particular need. Because it’s not about selling the products, it’s about solving client needs with a product. It’s a different approach.

And, as a result, I actually find in practice that these are often the advisors that end up with the widest range of different investment products. Perhaps lots of actively managed funds that fit one client need and some SMAs that fit another client need. As a wholesaler, you can get a share of their wallet by only having a product that fits a specific planning strategy or need. Because, if they see a lot of clients with a lot of different needs, eventually you’ll get a share of that advisor’s wallet. But you have to lead with, “How does this fit a client’s planning need?” not, “What are the features of this product in particular?” It’s an important difference.

Investment Wholesaler Segmenting And The Four Types Of Financial Advisors

The Breakdown Of Financial Services Industry Wholesaling Channels [Time – 13:30]

We’ve got these four different types of advisors: the fee for service financial planners, investment managers, asset gatherers, and needs based sellers. Four different ways that advisors approach client situations and frame their own value proposition, four different perspectives on what kinds of investments are best to meet the needs of their business, and very different likelihoods to use different types of solutions. TAMPs are primarily the domain of the advice oriented financial planners on the upper left, and the asset gatherers on the lower right. Those investment oriented product centric folks or planning-centric advisors who just don’t even really want to do the investment stuff. They just recognize the client’s money, hustle it in somewhere.

SMAs may also get used by asset gatherers, but unique SMA strategies are particularly good for those in the needs based selling category in the lower left. By contrast, ETFs are primarily getting bought by investment managers in the upper right, as well as TAMPs themselves that are kind of being investment managers and then gathering assets under it. Because they view their value proposition as being the investment manager, so they don’t want to pay an active fund manager, TAMP, or an SMA. They want to get that advisory fee for managing the assets and then pick the appropriate building block. I think that’s where a lot of the adoption of ETFs in particular has been.

But again, I can’t emphasize enough that for any wholesalers out there, just looking at industry channels at this point is a terrible way to segment advisors. There are investment manager types in broker-dealers, there’s Rep-as-PM, and then RIAs. But not all RIAs want to be investment managers. Some just want to do financial planning and might outsource to a single TAMP. And then others are aggressive asset gatherers and then they might also still outsource to some TAMPs and SMAs. But if you come with a better product, you might get a slice of their business. If it’s a planning-oriented advisor, you’re either going to win all their business or you’re probably going to win none of it because they tend not to split because they just want to find a straightforward investment solution so they can get back to focusing on the financial planning.

The other key point of this is to recognize that however the advisor is focused, that’s also how the advisor wants to be approached. But if I’m an investment manager who picks investments for my clients, you have to approach me as a gatekeeper that picks investments. You know, show me your one best product that might make the cut in my portfolio and maybe I’ll decide it’s worthy. Although, in all likelihood, I’ll probably just tell you, “Go away and stop bothering me. If your product comes up in my analysis, I will call you.”

But if I’m an asset gatherer and you can give me a product that I can easily gather assets into, ideally one that this is so great it sells itself, I might be very, very interested. Now, on the other hand, if I’m focused on needs-based selling, don’t come at me with products. Come at me with planning strategies and sales ideas which your product happens to fit into. And if I’m focused on fee for service planning, again, just don’t even bother trying to get a slice of my assets. Either be my trusted partner that I can outsource to entirely, or just don’t waste your time and mine.

But the bottom line is just to recognize that the whole advisory industry is in the midst of reorienting itself, of redrawing its dividing lines, where we’re reinventing our value propositions and we’re refocusing. And frankly, I think DoL Fiduciary is just accelerating some of this change, as is the tech innovation overall. And just think about it for a moment. There are advisors at large independent RIAs, Merrill Lynch, Vanguard, Schwab Private Client, who all operate as fiduciaries, use centralized investment management propositions, and lead with financial planning. Whoever thought that an independent RIA, Merrill Lynch, Vanguard, and Schwab would be a shared distribution channel in the industry, in the same category, or that RIAs and subset of asset gatherers at broker-dealers would fuel the growth of managed ETF portfolios? All of these dividing lines in the industry are getting redrawn across the channels to the point that channels don’t work anymore. You have to carve it up differently.

I hope that’s some helpful food for thought, and perhaps for some of you a new or different way to think about how to divide and segment the financial advisor landscape. This is Office Hours with Michael Kitces. Normally 1 p.m. east coast time on Tuesdays, but because I was onsite consulting with a large investment manager that’s trying to understand our space yesterday, I had to record today instead. Thanks for hanging out. I appreciate you joining us, and have a great day, everyone!

So what do you think? Do financial advisors vary based on client approach and value proposition? Do you wish wholesalers would better segment the market to provide value to you? 

It’s award season: Best practice and the value of awards

It’s award season: Best practice and the value of awards

In my line of work, I’m constantly thinking about annual reports; I not only read a lot of annual reports but I analyze them every day. And yes, I even believe that annual reports are important! In fact, I’d even say very important- and even useful!

I am also very aware that there is a lot wrong with annual reports – the length, the complexity, the ever changing and demanding legislative and regulatory environment, the list goes on… Despite this, I do firmly believe that you need to see the annual report as an opportunity rather than an obligation. Why? Because it’s a chance to ‘tell your story’. You have to produce an annual report every year so use it as an occasion to get your messaging right. Use the process to stimulate discussion and drive an overarching communications framework that can be used both internally and externally.

I always try to encourage organisations to not only challenge themselves, but to challenge their internal audiences, their Boards and other stakeholders and to look hard at what they are saying to their stakeholders. On top of this, it’s vital companies think about how they are communicating and that they are not missing an opportunity to better communicate their long-term strategy, value creation story and drivers of business performance in a more meaningful, connected way across their communications channels.

This is the reason why I am a huge advocate of Awards that recognise companies that make a proactive effort to promote, clear and consistent investor communications. The Investor Relations Society Best Practice Awards do just that and, now in their 17th year, celebrate those companies that ‘stand out’ across a number of different Awards, including Best Annual Report.

So what are the judges looking for?

Judges last year were looking for evidence of innovative and effective reports that communicate the strategy and investment case of the company. Companies were marked up if they used their Report as a communications tool to provide insight into the company’s main objectives and strategies, the principal risks it faces and how these might affect future prospects. For UK companies there was an additional focus on the objectives set out in the FRC’s Guidance on the Strategic Report.

Recognition across all categories

One of the most popular awards is ‘Best Annual Report’ (there were over 75 entries with 16 companies shortlisted across four categories – FTSE100, FTSE250, Small Cap & Aim and International).

In the FTSE100 category, ARM Holdings came out on top of a very strong shortlist including: British Land, M&S, Pearson, Taylor Wimpey and Sage. The judges stated ARM’s ability to present a complex business model in an easy-to-read Annual Report made them the final recipient of the Award, but it was a close contest and Taylor Wimpey, were highly commended by the judges for a well explained business model which included KPIs and impactful case studies. The judges also congratulated Taylor Wimpey for the concise and engaging presentation of their Report.

In the FTSE250 category there was another competitive shortlist of six, with judges picking DS Smith out from the crowd to win the award due to their clear and easy to understand business model, innovative use of graphics and good communication about sustainability issues.

Here are some of the other shortlists and winners in the other two categories, all which are worth a look for inspiration.

What was apparent across all categories – big and small – is that the best annual reports look to the future and show the vital link between effective governance and the business model, strategy and leadership statements. The very best also show the effectiveness of their business strategy in a way that demonstrates credible management and provide a window into the company and its culture. What is also clear to me and the judges, a good annual report can help differentiate your company, shape your reputation and build confidence with investors. So what’s stopping you? For more information go to irs.gov.

Dynamic Retirement Spending Adjustments: Small-But-Permanent Vs Large-But-Temporary

Dynamic Retirement Spending Adjustments: Small-But-Permanent Vs Large-But-Temporary

The origin of the “safe withdrawal rate” approach was simply to set retirement spending low enough to survive the worst historical sequence of returns we’ve ever seen; if a future scenario was comparably bad, the retirement portfolio would make it to the end, and if market returns turn out better, the retiree simply has to decide what to do with their “extra” money.

The caveat, however, is that for at least some retirees, the approach of “be conservative upfront, and increase your spending later if returns permit” is not very appealing. Instead, it’s more desirable to spend more in the early years, and simply engage in spending cuts if returns end out being less favorable. Except remarkably little research has ever delved into what the best approach is to cutting spending, if it actually does become necessary to make adjustments in order to stay on track!

Notably, this is different than how many retirees often react when a substantial market decline occurs, where the instinctive response is often to engage in substantial spending cuts for a “temporary” period of time, until the market recovers. For instance, if there’s a precipitous market crash of at least 20%, the retiree might trim spending by 20% as well for the next 3 years, until the portfolio recovers. Even if engaging in such spending cuts present serious strains to the retiree’s current lifestyle.

Except as it turns out, engaging in a more rapid series of smaller – but permanent – spending cuts can be even more effective. For example, rather than cutting spending by 20% for 3 years after a market decline, if the retiree simply commits to trimming real spending by 3% (permanently) in any year that market returns are negative – approximately the equivalent of forgoing an inflation adjustment during the down year, and a fairly trivial spending adjustment for most retirees – the safe withdrawal rate rises by almost 0.5% (to more than 4.5%). With the large-but-temporary cut, the safe withdrawal rate only rises by 0.1%, instead.

Ironically, it may feel to retirees that engaging in “small” cuts aren’t enough to ameliorate the consequences of a significant market decline early in retirement. Yet the reality is that the cumulative effect of small cuts really does add up – more than engaging in large-but-temporary cuts – in a manner that not only helps keep retirement on track if there’s an unfavorable sequence of return, but arguably better aligns to how most retirees spend as well, where real inflation-adjusted spending typically declines in the later years anyway. And of course, if market returns are actually favorable, the retiree not only avoids substantial spending cuts, but enjoys the benefit of starting their retirement spending from a higher level in the first place!

Dynamic Retirement Spending And Safe Withdrawal Rates

Traditional safe withdrawal rate analyses assume a retiree will take steady, ongoing withdrawals from their retirement accounts without deviating from their original level of spending. While there is nothing wrong with this assumption so long as it reflects a particular retiree’s goals, the reality is, retirees can choose to be flexible in their spending as well – and a willingness to cut spending when times are tough means there may be potential to start spending at a higher rate in the first place. For instance, in the event of a recession and a severe market decline, retirees can choose to trim their spending in response, leaving more of the portfolio invested for a future recovery.

At one extreme, a retiree could simply take a certain percentage of a retirement portfolio every year, which would naturally adapt to market volatility (as the same percentage of a smaller account balance after a bear market will produce a smaller withdrawal, and vice versa in a bull market). In fact, mathematically, such a strategy would ensure that the portfolionever actually depletes, as the worse the portfolio performs (and the smaller the account balance gets), the smaller the withdrawals become. The caveat, though, is that translating 100% of market volatility directly into spending volatility may not be tenable for the average retiree, forcing too much change in spending from one year to the next. Most people can only tolerate so much change in their lifestyle in a short period of time.

Thus, retirement spending strategies can be considered as part of a continuum, from spending a fixed dollar amount (e.g., 4% of the initial portfolio value, adjusted each subsequent year for inflation regardless of market performance) to spending a fixed percentage of the portfolio each year (e.g., 4% of the then-current portfolio value, recalculated annually). And in between lie any number of strategies that apply at least partial spending adjustments in bad (or good) times, with less rigidity than fixed lifetime real-dollar spending, but more stability than simply recalculating annual spending as a fixed percentage of a volatile portfolio.

In fact, it is this kind of spending flexibility that underlies approaches like the Guyton-Klinger “decision rules” for taking retirement withdrawals. Jonathan Guyton and William Klinger found that initial withdrawal rates could be increased from roughly 4.1% to 5.2-5.6% by utilizing a series of decision rules which determine whether a retiree will make adjustments to their portfolio – such as not taking an inflation adjustment in a given year when the market is down, or cutting retirement income more significantly in bad times (and then making it up later once markets more-than-recovered).

Dynamic Withdrawal Rate Spending Strategy Spectrum

Wade Pfau has published a broad overview of different variable spending strategies and their impact on retirement income and initial withdrawal rates. However, as Pfau notes, in a world of dynamic or variable spending strategies, initial withdrawal rates aren’t entirely meaningful for comparison purposes, since what started out as higher income under one strategy may quickly diminish and be lower under another.

Nonetheless, the point remains that if retirees are willing to be at least somewhat flexible in their retirement spending, a somewhat higher initial withdrawal rate may be feasible. Which is important, as the nature of dynamic spending strategies is only to trim spending when necessary – which means a willingness to be flexible may allow a retiree to start out at a higher spending level and spend more throughout their lifetime (if an adverse sequence of returns never actually occurs).

The Benefits Of Cutting Spending When The Market Declines

One way to assess the relative benefits of dynamic spending is to evaluate the impact that even a relatively simple spending adjustment rule can have on the sustainability of (higher initial) retirement spending.

A straightforward starting point is simply to assume that any time a market decline occurs, a retiree will make a temporary but meaningful cut in spending. For instance, what is the impact on the initial safe withdrawal rate if a retiree commits to cutting spending by 10% for 1-year after a market decline of 20%?

The answer, unfortunately, is “not much”. Based on Robert Shiller’s annual data and utilizing a 60/40 two asset class portfolio (S&P 500 and short-term bonds), the initial safe withdrawal rates for 30-year retirement periods based on this adjustment is only an increase in the initial SWR from 4.08% to 4.09%. Clearly, this strategy isn’t buying much more in terms of additional initial spending.

Part of the reason for this is that annual declines of 20% are relatively uncommon – only occurring in about 5% of years since 1871. (Note: because annual Shiller data is being used here, these are only year-to-year 20% declines, and 20% intra-year declines would be more common.) Perhaps this frequency simply isn’t high enough, as retirees would, on average, only experience 1.5 spending cuts throughout retirement.

Consider the same decision rule (cut spending by 10%), but this time the spending cut triggers whenever the decline is greater than 10% or 0%, which would have been experienced in roughly 11% and 28% of years, respectively.

Initial Safe Withdrawal Rates When Cutting Spending By 10% For 1-Year

As you can see, this dynamic spending strategy is starting to have more of an impact. Though a 10% decline trigger still didn’t accomplish much (it only lifted the SWR from a baseline of 4.08% to 4.11%), willingness to cut spending by 10% anytime the calendar year return of the S&P 500 was negative lifted the SWR to 4.33%.

Notably, though these thresholds are entirely arbitrary, there is some intuitive appeal to a dynamic spending strategy with a trigger of 0%. If an advisor has an annual review with their client, they simply check to see whether the return was positive or negative for the past year. If the market was up, just continue as planned. If the market was down, then the client takes a 10% (real dollar) spending cut for the next year.

But perhaps we should consider adjusting factors other than the market decline that triggers the spending cut. Perhaps one year simply isn’t sufficient for the market to recover, and a more prolonged spending cut would have a larger impact?

The Impact Of Larger And More Extended Spending Cuts After Market Declines

To analyze the impact of taking more extended spending cuts after a market decline, consider the same trigger points as before, but with the client agreeing to take a 3-year cut in spending anytime a cut in spending is triggered.

Initial Safe Withdrawal Rates When Cutting Spending By 10% For 3-Years

Interestingly, this strategy may not buy the retiree as much of an increase in initial spending as expected. There is some benefit to taking a longer cut in spending, but the bulk of the gains in initial SWR come from taking the cut in the year immediately after a decline, as the fact that an extra two years of spending cuts only increases the initial SWR under the 0% trigger strategy from 4.33% to 4.40%.

Of course, there’s one more variable we can adjust here, which is the total spending cut. So what happens if the retiree is willing to commit to a 20% spending cut anytime a cut in spending is triggered?

Initial Safe Withdrawal Rates When Cutting Spending By 20% For 3-Years

Notably, the larger spending cut does provide a significant boost. A retiree willing to commit to a 20% cut for 3-years anytime the market is down over the past year can actually boost their initial SWR from a baseline of 4.08% to 4.68%. However, the caveat here is given that more than 1-in-4 years since 1871 were negative years, making cuts that last 3-years means that, on average, the client would only not be making a cut roughly 1 out of every 4 years. Therefore, it may arguably be better to frame such a strategy as receiving “bonuses” that occur in times of prolonged market growth (with a lower baseline spending level), rather than subjecting clients to so many “cuts” throughout retirement. For instance, instead of framing these as cuts during bad times, a retiree may effectively start out with a safe withdrawal rate of 3.74% and boost it up to 4.68% whenever the market’s returns were positive for 3 consecutive years.

The Benefit Of Small Permanent Spending Cuts Vs Large Temporary Adjustments

However, there is another way we can adjust these dynamic spending strategies. So far we’ve assumed a retiree makes a spending cut and then returns to the inflation-adjusted path they were previously on, but retirees could instead decide to make smaller but permanent cuts in their spending, which would smooth out consumption and provide less dramatic swings in annual spending.

To examine this, we first consider the same trigger thresholds as before (0%, -10%, and -20%), but now, instead of one time cuts, a retiree takes a 1% (real) cut that is permanent over their entire 30-year retirement horizon. In other words, if inflation was 3% for a given year, then if the market was down the prior year, the retiree would only take roughly a 2% increase in spending the next year.

Initial Safe Withdrawal Rates When Cutting Spending By 1% Permanently

Again, we see effectively no difference at the more extreme trigger thresholds (e.g., 20% market declines), but for a retiree using a trigger threshold of 0%, there is a small but material boost in the initial SWR up to 4.24%. In other words, if a retiree is willing to take a 1% real spending cut any time the market was negative over the prior year, the historical initial SWR is lifted from 4.08% to 4.24%. And while this boost is very modest, the cut in any given year is modest as well, giving a retiree ample time to adjust to a new, lower level of spending.

So what happens if we look at a larger permanent cut? Consider the same scenarios but this time with a cut of 3% whenever a threshold is triggered.

Initial Safe Withdrawal Rates When Cutting Spending By 3% Permanently

Like the other scenarios, there isn’t much gain in initial SWR from the more extreme thresholds, but a retiree willing to take a permanent 3% spending cut whenever the market is negative over the past year (roughly akin to forgoing a cost-of-living adjustment after a down year), can boost their historical initial SWR from 4.08% to 4.56%. To put that in context, forgoing a 1-year inflation adjustment has more benefit than engaging in a 10% spending cut for 1-3 years, while arguably being far less disruptive for most retirees. And an initial safe withdrawal rate of 4.56% instead of 4.08% is the equivalent of a 10% increase in real spending on day 1 of retirement.

However, it is important to note the difference between short-term cuts in spending (e.g., revert back to the inflation-adjusted path an individual was on prior to the trigger) and cumulative cuts in spending (e.g., cut is permanently made to one’s spending) can be significant:

Cumulative Impact Of Different Variable Spending Rules

As you can see in the graphic above, just making one-time cuts of 3% each time a rule was triggered (3 times in this example), results in significantly more long-term spending reductions than a variable spending rule of cutting spending 10% for 3-years after a triggering event (and then returning to “normal” spending). The longer short-term cut may sound more dramatic, and from the perspective of year-to-year spending volatility, it is, but rules that make permanent cuts to spending actually tend to be more substantial when viewed over a long time horizon (which is why they have a greater long-term impact). Of course, the graphic above shows the percentage of initial spending, which is actually beginning at different levels for different strategies, but the point to illustrate is that the retiree experiencing permanent cuts is actually experiencing declining real(i.e., inflation-adjusted) spending in the long run, whereas the baseline retiree is not. Adjusting for the fact that each strategy is beginning at different points, the scenarios associated with a trigger rule that might be expected to generate a reduction about 1-in-10 years (-10% trigger) would suggest that the 3% permanent cut strategy would actually start about 3.7% higher than the baseline strategy but end about 5.4% lower than the baseline.

Nonetheless, the fundamental point remains: engaging in a series of small-but-permanent cuts is actually more effective than large-but-temporary cuts. Such a strategy may feel counter-intuitive to retirees, who, in times of substantial market declines, may actually be inclined to try to cut their spending even more to defend against the risk of depletion. Nonetheless, the fact that markets generally recover within a few years, and that most retirees are still “only” spending around 4% to 5% per year, means small-but-permanent cuts do more to keep retirees on track. Although, at the same time, if the small-but-permanent-cuts approach is to be used, the data suggests that more modest triggers – e.g., taking a 3% cut every time the market’s returns are negative – are necessary, as small cuts that are too infrequent simply don’t do enough to have an impact.

Notably, the higher the initial withdrawal rate due to taking small-but-permanent cuts, the more cuts that would need to be experienced in order to decrease spending back to the “baseline” level, but the lower we would ultimately expect spending to decline below the baseline as well. Though arguably, subsequent small spending cuts are consistent with the research that shows retirees tend to decrease their spending (in real dollars) in later years, anyway. And using a dynamic spending strategy also means the retiree can continue to enjoy greater spending, if/when markets actually do provide a more favorable sequence of returns!

Dynamic Spending Strategy Initial Withdrawal Rates By Spending Cut Trigger

Other Considerations With Flexible Spending Strategies


One factor influenced by the decision to adopt a flexible approach to retirement spending which is not examined above is the way in which a more flexible spending policy allows for higher equity allocations in a portfolio. In fact, as Irlam and Tomlinson (2014) found in their analysis of recommendations generated by dynamic programming relative to rules of thumb used by advisors, variable spending policies make it more realistic to adopt higher equity allocations, and both variable spending policies and higher equity allocations tend to increase withdrawal rates. However, individuals adopting a higher equity allocation and a cumulative variable spending policy (i.e., small cumulative cuts) would need to pay increased attention to sequence of return risk at the front-end of retirement, as higher initial withdrawal rates that don’t respond quickly to a particularly poor sequence of returns could only exacerbate the effects of sequence of return risk.

Of course, this analysis doesn’t account for the risk tolerance of a retiree and their potential willingness (or not) to accept a higher level of equity allocation or shortfall probability, either of which could suggest a lower or higher initial withdrawal rate. A study by Finke, Pfau, and Williams (2011)found that more risk tolerant individuals may prefer withdrawal rates between 5 and 7 percent once accounting for a guaranteed income of $20,000.

More generally, it’s important to recognize that, for retirees, “risk tolerance” is not only about portfolio volatility, but also about spendingvolatility, which means those with greater risk tolerance may truly be willing to adopt both more aggressive portfolios and more dynamic spending strategies, while those who are more risk averse may well prefer to both avoid portfolio volatility and seek out more spending-stable strategies.

Of course, coordination with other (non-portfolio) assets could be considered as well. For instance, the use of a HECM reverse mortgage or the use of annuities, such as a QLAC, may influence how flexible a retiree can be in their spending policy.


An individual’s goals and preferences will partially drive what types of flexible spending policies they are willing to entertain. As noted above, retirees with more risk tolerance may also tolerate more spending variability (and vice versa for the risk-averse retiree). Similarly, a retiree with a considerable amount of discretionary spending may be more open to making periodic large cuts, given that their spending budget can “handle” it without impairing essential expenses, whereas someone who is just scraping by on essentials won’t realistically be able to make the cuts needed to make the strategy work.

Overall, though, given that most people are assumed to want to “smooth” their consumption over time, needing to make large cuts 25-30% of the time (or more, in some particularly bad sequences of returns) probably won’t be attractive to most retirees. From this perspective, strategies that lend themselves to small-but-permanent (i.e., gradual and cumulative) cuts are likely more realistic to implement. Additionally, given that most retirees appear to experience decreasing spending in retirement, variable spending policies tied to periodic reductions in spending may be an effective strategy to control discretionary spending creep if essential expenses are declining but retirees are just finding ways to spend any extra cash flow. All things considered, the natural urge retirees feel to tighten their belts during a down market may make it an ideal time for an automatic spending cut.

Of course, the flip side to this is that it may be equally appropriate to makeupward adjustments in retirement spending once a retiree has the benefit of hindsight to inform their sustainable withdrawal rates in retirement. Particularly given the conservativeness of safe withdrawal rate methodologies (i.e., they are testing against the worst case scenarios experienced to date), there’s reason to believe that many retirees will get further into retirement and have an option to increase their spending, which can be implemented through spending policies such as the Guyton-Klinger withdrawal rate rules and a ratcheting safe withdrawal rate.

Either way, though, a key point of getting retiree buy-in is that retirees themselves must agree to the strategy, and commit to it in advance. This could involve the use of a “Spending Withdrawal Policy” statement that explicitly documents what the spending adjustment triggers would be (any negative return, or only a -10% or -20% drawdown), the magnitude of the spending adjustments (e.g., 1%, 3%, 10%, or 20%), and how long the spending cut will remain in place (permanent or temporary). Ideally, theemerging crop of safe withdrawal rate calculator tools for advisors will also be adapted to illustrate the impact of these strategies, and the relative benefits of small-but-permanent versus large-but-temporary dynamic spending adjustments.

The bottom line, though, is simply to recognize that the ability to make mid-course adjustments to a retirement plan helps – and enough so, that it actually allows for a higher initial withdrawal rate in the first place (possibly starting spending more than 10% higher than a traditional safe withdrawal rate approach!). Yet, even with a plan to engage in dynamic spending, it’s still necessary to adopt a strategy that both has a materially positive impact on the plan and that entails spending adjustments that retirees can actually handle. To that end, it is notable that the approach of “small-but-permanent” spending cuts is actually both more effective at sustaining a retirement portfolio than large-but-temporary cuts, and arguably is more palatable for most retirees to actually implement, too!

So what do you think? Are small-but-permanent spending cuts more effective than large-but-temporary adjustments? Is either more realistic for retirees to adopt? How do you talk to your clients about dynamic spending strategies?

Robo-Advisors Pivoting Towards More Human Advisors, And More Affluent Clients

Robo-Advisors Pivoting Towards More Human Advisors, And More Affluent Clients

Earlier this year, the original robo-advisor Betterment made the stunning pivot away from a “pure” robo solution, launching Betterment Plus and Premium tiers that would offer access to human CFP professionals, in addition to the Betterment technology itself. Now, as Betterment reaches its 7-year anniversary, the company is introducing a “new look” intended to make it look and feel less like an “upstart” and more like an established player… one that can attract more affluent investors (after the company raised its fees on its most affluent clientele by 66% earlier this year, from 15bps to 25bps). And as Betterment continues to pivot upmarket, it has also indicated it may start offering a wider range of investments, including access to more alternative investments. Notably, though, these pivots aren’t unique to Betterment. Sallie Krawcheck’s “robo-advisor-for-women” platform Ellevest has also quietly rolled out “Ellevest Prime”, hiring human financial advisors who will provide personal financial planning advice to affluent Ellevest clients, who will pay an advisory fee that starts at 0.90% with a $500,000 minimum. And student loan refinancing platform SoFi also announced a launch into wealth management, again by adding human financial planners to offer advice to the above-average-income upwardly mobile customers already using the SoFi platform. In other words, both leading and newcomer robo-advisors are no longer focusing on being a technology-based investment solution for Millennials… they’re becoming tech-augmented human “cyborg” advice platforms that are raising their prices, expanding their product line and service offerings, and trying to serve an increasingly affluent clientele regardless of generation. Just like every other financial services firm in the crowded marketplace.

Five Earnings Cycle To-Do’s for the Investor Relations Officer

Five Earnings Cycle To-Do’s for the Investor Relations Officer

When many management teams contemplate the quarterly earnings cycle, they think primarily about compliance – dotting the “i”s and crossing the “t”s. But while compliance is a major driver of financial disclosure, it should not be the only one – if it were, companies would file the 10-Q or 10-K and leave it at that. Take a more strategic approach to your next earnings cycle with these five tips.

1) Edit the earnings call transcript.

I know what you’re thinking. I just said you should be more strategic with your earnings process, and the first thing I mention is completely tactical. Or is it? Many companies are now posting the transcripts of their quarterly conference calls, or at least management’s prepared remarks, to their websites. Other services make the full transcript available whether you ask them to or not. Some of these services will allow companies to edit their transcripts for accuracy, so take advantage of the opportunity. Transcript services can do a good job, but they still make mistakes – some can be significant. We recently saw a company’s revenue transcribed with an extra zero, which would have been quite a shock – and very misleading – to investors had it not been corrected.

2) Correct the estimates.

Believe it or not, FactSet and First Call can be wrong. Either one of your covering sell-side analysts submitted an incorrect estimate, or the service made a mistake. Either way, you are entitled to correct factual errors so that the estimates displayed online match the corresponding analyst’s most recent research report. Of course, you aren’t allowed to tell analysts what their estimates should be. That would be a clear violation of Regulation Fair Disclosure. Correcting analysts’ estimates at FactSet or First Call provides investors with an accurate consensus, which in turn can influence trading.

3) Have something to say.

Have you ever finished reading an earnings release and still wondered how the company performed? Or how the results related to its business strategy? Too often, management quotes in an earnings release read as evergreen pablum. Or as one of my colleagues likes to say, they contain too much “bow-wow.” Quotations are management’s best forum to convey succinctly its vision and the performance drivers for the quarter. The earnings conference call allows for more explanation, but that assumes investors will take the time to listen to the call or read the transcript. The press release is the first opportunity. Instead of letting it slip away with meaningless filler, develop the two or three most germane points you want to communicate, and then integrate those messages within the release.

4) Aim for clarity and transparency.

Companies aren’t perfect, and neither are their results. Sales may sputter. A large customer could cancel that order you were counting on. And a large medical claim you didn’t foresee could appear just as you thought your results would turn a corner. Investors know this; in fact, they expect it. They aren’t looking for perfection, but they do expect transparency. Whether the quarterly performance is good or bad, they want to know why. Don’t go into elaborate detail, but pull back the curtain enough for the investment community to understand the puts and takes. As you provide more insight, you will build credibility with your shareholders. This will provide investors comfort that they understand the business and its drivers, which should lead them to be more supportive of the stock.

5) Use slides to shape your story.

While many companies use PowerPoint slides to accompany the earnings call, few use them well. Typically, the slides will be filled with bullet points that read verbatim from management’s prepared remarks. On the other end of the spectrum are the companies that simply post their financial tables without any context or commentary. If you are in either category, you have missed an opportunity to emphasize your key messages. Instead, aim for effective simplicity in your slide content. Use slides that provide context for the results and enhance the messages you selected in point #3. Don’tobfuscate by cluttering the slides. Do use them thoughtfully and judiciously, in order to solidify your key points in investors’ minds. If you’re looking for ideas, take a look at Chevron, Coca-Cola or PayPal.

By choosing to think strategically about the quarterly earnings cycle, management teams can help investors better understand their companies’ business performance and strategy. In so doing, press release and slide content will begin to connect with investors, elevating earnings to a process both CFOs and investors can support. And that is a far cry from dotting the “i”s and crossing the “t”s.