portfolio
Retirement
by Design
As on advisor found, planners need to
know how to do much more than build
wealth for their clients. By Charles Farrell
Helping investors live off their wealth is a very dif- ferent business from help- ing them build wealth.
But managing retirement income is
something every advisor needs to
learn how to do — and soon.
With about 10,000 baby boomers
turning 65 each day, our industry will
soon be dominated by the concept of
retirement income management. That
means you’ll need to change your
investment and business operations
to meet the changing needs of your
clients in an era of low (and sometimes
negative) investment returns.
Over the last decade, as more of
our clients were moving into their
retirement income phase, we noticed
that they had investment objectives
and service needs much different
from the needs of our clients who
were still accumulating wealth. In
fact, we determined that it was taking about twice as much work to
manage the retirees’ finances, yet
we had to do it for the same fee. That
meant we had to become more effi-
cient and focused if we wanted to
profitably serve this client base.
We identified three primary areas
where we were doing the most additional work: portfolio management,
distribution planning and investment tax management. The key to
managing these aspects of our practice efficiently was to commit to one
portfolio structure for retirement
income clients. That then allowed us
to streamline the distribution planning and tax management.
Portfolio ManageMent
In the late 1990s, not many advisors recognized retirement income
management as a separate style of
investment management. Because
market returns were so good, the
plan was simply to use capital gains
to produce the distributions. If your
portfolios returned 15% a year, you
just distributed 6% and your retired
clients were probably fine. Thus you
could run the same portfolio for clients who were building wealth as
those who were living off it.
But you can’t do that now with
retired investors. Stock prices have
declined for many of the past 11 years
and we’re facing record low interest
rates. We may well be in for another
decade of subpar financial market
returns, and capital gains probably
won’t save your retired clients. That
means you’re going to need a specific
investment strategy for retired clients
that can meet their objectives. You’ve
then got to run that strategy across
your client base so that you can efficiently manage the portfolios as well
as the distributions and the taxes.
Once we came to this realization
several years ago, we developed a
model portfolio that was based on
the four common objectives of our
retirement income clients:
• Current income
• Growing income
• Principal protection
• Long-term capital gains
Those objectives are listed in
order of priority, meaning they are
not all equal. For instance, current
income is more important than long-
