There has been a very popular series of commercials running for the past year or so featuring the great line, “Just OK is not OK”. The campaign is extremely humorous and can be looked at in ways that have many parallels with the advisor-client relationship.
In the campaign, professionals (a surgeon, a skydiving instructor, even a tattoo artist) are being asked questions by their clients about the risky thing they are about to do—have surgery, jump from a plane or get a tattoo. The humor of the ads is in seeing the clients’ becoming increasingly uneasy when the professionals’ answers are “just OK”.
As I read a recent article in Wealth Management, “Longevity is the Biggest Risk Facing Clients Today,” I couldn’t help but think of these commercials. The advisor-authors laid out all the reasons clients should be worried about longevity—increasing life expectancy (nearly 1/3 of a client’s lifetime may be spent in retirement) and historically low interest rates—yet somehow managed to never use the word “annuity”! An annuity is the only product specifically designed to address longevity risk! Instead, they only discussed probability-based, investment only portfolios.
So, in the spirit of the commercials, here’s the advisor-client dialogue I’m imaging in my head as I read this article:
ADVISOR: So are you worried about your income in retirement? Your nest egg may have to last you 30 years or more.
CLIENT: Yes. I am worried. That’s what keeps me up at night.
ADVISOR: Yeah, me too. It’s a pretty tricky problem.
CLIENT: Can’t I just live off a fixed income portfolio like my grandfather did?
ADVISOR: In today’s interest rate environment? You’re funny. I’ll need to keep you more heavily invested in the market. You have to take some more risk, but as long as the sequence of returns lines up, you should be OK.
CLIENT: OK?? What happens if the market is down?
ADVISOR: I’ll just cut back on your spending.
CLIENT: So you’ll give me an allowance from my own money?
ADVISOR: Yes, I’ll tell you how much you’re allowed to spend each year, whether or not you can take that vacation and, if you don’t have any negative financial surprises or bad health you’ll probably be OK.
CLIENT: Probably? How about an annuity? Won’t that guarantee I don’t run out of money?
ADVISOR: Whoa…Stay in your lane, bro!
The notion of an investments-only retirement income strategy, such as was laid out in the article I read, may have been OK in the past, but in 2020 “Just OK is not OK”. The converging challenges of a prolonged, historically low interest rate environment, the scarcity of pensions, the reality of a 30+ year retirement, the possibility of an adverse sequence of returns and the probability of negative financial surprises require a more advanced strategy. No longer is the goal to fund a 15 year retirement with bonds that pay 6%. Advice that was OK then is not OK now.
Fortunately, a robust marketplace of commission-free annuities – that RIAs can bill on - now exists. The list of academics supporting annuities to generate retirement income is long and illustrious and includes Nobel Prize winners. Their research demonstrates that annuities not only help address longevity risk, they can generate retirement income more efficiently than traditional fixed income, i.e. $1 in an annuity will generate more income than $1 in a fixed income portfolio. This enables more investment in the equity portion of the portfolio. Plug one into your planning software and let your client choose between a plan with or without an annuity.
It’s time to evolve from investment-only portfolios biases to serve clients based on the realities of today, not 20 years ago. Investment-only retirement income portfolios are out-of-date, economically inefficient and unnecessarily put clients at risk — and that’s not OK.
David Lau is founder and CEO of DPL Financial Partners, a membership network for RIAs that want to incorporate commission-free insurance into their practices.