Different Rules, Different Tools for Income Advisers

Retirement income planning- different rules, different tools

My dad was a finish carpenter by trade, but he knew every aspect of building including concrete and excavating, electrical, plumbing, roofing, hardwood, tile, cabinet construction and installation, ceiling applications, paint, and trim.  He always bought the best tools and loved precision.  Although he had the understanding and ability to do every aspect of building, he excelled at trim work and could hang a door in 20 minutes, and trim an entire room in crown molding in about 1 hour.  When I was young I would watch him work and I noticed he had several different types of hammers.  He had a trim hammer with a smooth head, and a 16 oz hammer with a knurled head for pounding 16 penny nails into framing.  He had a rubber head mallet for setting tile and formica, a brick hammer, a drywall hammer, a sledge hammer, a roofing hammer, and even a ball peen hammer.  I asked him once, “why can’t you use the same hammer for everything?”  They all look kind of alike.  He laughed.  Then he taught me a lesson that has served me very well my entire life.  He said, “Each tool has a specific purpose and a specific design to achieve that purpose.”  Even you have a purpose, he said, and God has given you a set of skills and abilities unique to you.  Some day you will learn how to use those gifts and the purpose they serve.  Thanks for the lesson Pop!

That brings us to retirement income planning.  Some of my colleagues believe they can do both wealth accumulation and income distribution with the same tools.  The answer is…they can, but why would you want to use a tool for something other than what it is designed to do optimally and with precision?

The tools are simple.  They include SPIA’s, DIA’s, FIA’s, Stocks, Dividend stocks, ETF’s, Bonds, CD’s, CASH, MLP’s, REITS and Treasuries.  Some advisors only use a few of the tools and perhaps forfeit the ability to create more certainty, security, stability and even growth in some cases.  Using the wrong tool or combination of these tools may reduce precision, and stability and increase risk and fees.

3 Types of Advisers

There seems to be 3 types of advisor giving retirement income advice.

1. Advisors with securities registrations only, may be commission-only unless they hold a Series 65 or 66 registration.  Fiduciary advisors generally hold a Series 65 or 66 license.  Stockbrokers are held to a suitability standard.  You can read more about this in Investopedia.

2. Advisors with insurance license only – cannot discuss securities unless discussion is of a general nature.  They advise you about buying insurance products.  Insurance-only licensed agents are not held to a fiduciary standard even though some may use the term to describe themselves.

Hybrid Advisor – Licensed to offer advice based on a fee or commission basis and also hold an insurance license.  They may offer insurance and investment products to act in the clients best interest. Not all of them do though. They may be under a fiduciary responsibility if they hold a 65 or 66 registration also.

The primary goal of a good retirement income planner is to provide guaranteed lifetime income ( which includes social security and pensions) to cover all fixed expenses with the LEAST amount of money so the remaining money can be invested for more growth and provide inflation protection over a potentially long retirement.  Can you guess what financial products are designed to provide the highest level of “guaranteed income” for a given dollar?  If you said stocks or mutual funds, you would be wrong.   Securities have no guarantees.  Only insurance products offer guarantees backed by the claims paying ability and financial strength of the insurance company.  These products are backed by statutory (legal) reserve requirements as well means there is a statutory $1 reserve for $1 obligation requirement.

Trying to provide income with securities only (stocks, bonds MLP’s, REITS) takes more risk, higher fees, and potentially more money due to our currently low yield (interest rate) environment.   Beware of securities-only advisors whose plans rely on “average rates of return”.  Average rates of return do not apply when you are taking money from a portfolio.  If you ask your financial representative how the “geometric mean” applies to income planning and he/she doesn’t seem to understand the question, you may want to find another adviser.

Average rates of return don’t matter in retirement

Average rates of return are irrelevant when you are taking money out of your accounts.  What becomes more important in retirement is “sequence of returns”  Sequence of returns means the order in which returns are achieved on a year by year basis.  If you lose money early in retirement versus late in retirement, you may not be able to recover because it took more shares at lower prices to provide the same paycheck in a down market.  Imagine retiring in 1999 and the first 3 years of your retirement you lost over 50% of your money.

Be agnostic about products

Financial products are neither good or bad.  They are simply tools.  Each tool has a purpose.  It doesn’t matter what they are called.  Consider judging all financial products on their merits, strengths, weaknesses and purpose just like you would a hammer. Avoid making judgements based on advertiser paid propaganda. Results are what matters.