Asset distribution: The next big wave
By Jason Kestler
Kestler Financial Group, Inc.
A wise man once wrote, "If you are feeling comfortable where you are, it's probably the body temperature at the middle of the pack." Those who have become leaders in our business have been the visionaries — those who see where the industry is going and are already there when the "middle of the crowd" arrives.
The buzz words over the last 10 years have been asset accumulation and asset allocation. I propose that if you jump on this bandwagon now, you may be following the wrong paradigm. The next big wave in our industry will be asset distribution. Don't get me wrong, asset accumulation and allocation are still very important. But with 76 million baby boomers approaching retirement, our next challenge as an industry will be providing them with a safe, dependable, consistent stream of income.
The skills we acquired in order to be successful in the past will continue to serve us well into the future if, and only if, we use those tools properly. If the wrong tool is used in a particular situation, the results could be disastrous! Let's look at an example.
Dollar cost averaging — This is the process by which a client makes recurring deposits (usually monthly) into an investment account. This could be a mutual fund, 401(k) or the like. By investing the same dollar amount every month, the client will buy more or less shares based on the fluctuating share price every month. As the share price rises, they buy fewer of the expensive shares. As the share price drops, they buy more of the cheap shares. This process allows the client to accumulate shares consistently at the lowest average cost. Planners and asset accumulators have always praised the benefits of dollar cost averaging.
Now, let's explore the benefits of dollar cost averaging within the new paradigm. For those clients still in an accumulation mode, the tool still works well. However, if the client is entering a distribution phase, dollar cost averaging in reverse could be a very damaging tool. That which worked so well to accumulate funds could serve to derail a sound retirement plan.
If a client or adviser chooses to use reverse dollar cost averaging as a method to distribute retirement assets, they are using a great tool for the wrong job. If the client redeems a fixed dollar amount every month, dollar cost averaging actually works against them. As share prices rise, they would redeem fewer of the valuable shares. If the share prices declined, they'd have to redeem more of the depressed shares to receive the same monthly income. This is the opposite of what they should be doing. However, it is a very common practice based on old paradigm beliefs. Let's look at another example.
Long term care — Does the thought of analyzing and proposing a long term care policy to one of your clients give you the shakes? How about the threat of a lawsuit for not doing so? Our job as advisers is not only to help our clients identify and take advantage of opportunities, but also to identify and avoid risks. With the probability of a serious auto accident at 1 in 240, most people wouldn't dream of driving a car without auto insurance. Yet, for someone over age 65, the probability of some type of long term care event is one in two.
Are you willing to risk your clients' hard-earned wealth on the flip of a coin? In the new paradigm, every client over age 50 should consider purchasing long term care. If they choose not to buy, you should have them sign a waiver of liability form. You should keep this in their file permanently. In the new paradigm, you can't allow the ravages of a long term care event devastate a well-thought-out retirement income plan.
Annuitization — Old paradigm advisers avoided the "A-word" like the plague. They had the belief that annuitization was an inflexible, irreversible, bad deal. And in many cases it was. In the new paradigm however, the concern is not that someone will die too soon, but that they will live too long. As life expectancy continues to increase, outliving your assets is becoming a very real possibility for today's retirees. New annuitization options look very different from their old paradigm predecessors. Indexed payouts, disability benefits, and flexible payment structures make annuities and the income streams they can provide a valuable tool in the new paradigm. Using annuitization — especially with short-term payouts — combined with other vehicles can provide a diversified, dependable income stream.