Why Constrained Investor is a Revolutionary Innovation

Given the high-stakes nature of income planning, it's tragic that a significant segment of the financial advisor community embraces an income-generation methodology that is truly deficient. For a long time, the deficiencies were camouflaged by an unprecedented, 14-year "bull" market that was engineered by never-before-seen levels of fiscal stimulus, combined with nearly $9 trillion in Federal Reserve money creation, combined with zero-percent interest rates. These measures inevitably propelled asset prices upward to heretofore unseen levels. It was, of course, unsustainable. Now, we find ourselves on the downside of those radical policies, and the result is inflation, a tanking stock market, rapidly increasing interest rates and extreme levels of economic uncertainty.

If all that is described above hadn't happened, we'd still have a huge problem in terms of retirement security. The reason starts with the common perspective among investment advisors that a market-based approach to income distribution planning is advisable. It's not, at least for most retirees. The markets-centric worldview led to the development of AUM-based client segmentation. That construct works well for investors in the asset accumulation phase. However, AUM segmentation is wholly inadequate when investors transition to decumulation. Why? Traditional investor segmentation makes no room for the issues that matter most in retirement income planning e.g., "flooring," risk-mitigation, and longevity risk protection.

Constrained Investor replaces AUM segmentation, or "wealth segments," with three, far more meaningful categories of investors who are nearing retirement or already retired. All investors will fit into one of the three categories: Underfunded Investors, Overfunded Investors or Constrained Investors.

Constrained Investor changes the calculus of income planning. It expands the scope of assessment of client needs by looking at the critical relationship between the retiree's investable assets, and the amount of their "must have" monthly income. It then furnishes a framework to determine which are Constrained Investors. Once identified, the income planning methodology must be one which places the highest priority on risk mitigation. Constrained Investors have no margin for investment losses that occur due to emotionally driven decision-making; they simply lack the cash cushion to absorb them. Yet, they require long-term exposure to risk assets. By incorporating safe monthly paychecks, and downside protection through guaranteed lifetime income, the investor's behavior dynamics can change. Retirees gain the capacity to remain invested in risk assets through all market conditions.

All Constrained Investors reach retirement with savings. That's good. However, the amount they've saved is not high in relation to the income they require to fund a minimally acceptable lifestyle. Therefore, the issue is less about the amount saved, and more about the relationship between that amount and the income that the retiree must have to fund a minimally acceptable lifestyle (the amount of monthly income needed to cover all vital expenses, plus a minimum 30% buffer for a modest amount of lifestyle expenses).

Advisors are sometimes surprised at how much money some Constrained Investors have accumulated- $10 million, or more. With an Assets-to-Income Ratio of 5.4%, a client with AUM of $20 million- who requires an income of $90,000/month- is very much a Constrained Investor. To determine if a client is Constrained, we use the Income-to-Assets Ratio. If the resulting percentage is 3%, or more, the client is a Constrained Investor.

A Profound Meaning for the Annuity Industry

When a financial advisor fails to recommend lifetime guaranteed income to a Constrained Investor, the advisor's failure is reckless bordering on malpractice. The "Wall Street" Approach to retirement income planning, the Systematic Withdrawal Plan- or the "4% Rule," is a disastrous choice for millions of America's Constrained Investors. Firstly, in practice, I say there is no such thing as a "safe withdrawal rate." Read why here. Constrained Investors must have protection against longevity risk. I believe that an advisor's failure to recommend annuities causes a breach of the RIA's fiduciary duty. Read why here.

How Advisors Tend to Fail "Boomer" Women

The failure of the "Wall Street Approach" to incorporate lifetime income annuities leaves many women unprotected against longevity risk. Considering that women have longer life expectancies than men, this is an unconscionable failing on the part of the advisor. Research shows that the majority of "boomer" women are concerned about outliving their income. Moreover, the markets-based approaches to income planning that many investment advisors rely upon are misaligned with the investing preferences and priorities that "boomer" women express to researchers. The plain truth is that men and women look at money differently. Men are concerned with historical investment performance and the process of individual stock picking. Women prioritize goals, risk-reduction and recognition of their values. They want to be listened to in the context of an authentic relationship with the financial advisor. When these dynamics are not present, in most cases the woman responds by firing the financial advisor, $trillions in what I call "misaligned money, " poorly planned retirement savings, has created a unique and absolutely huge business opportunity for agents and advisors who understand how to properly plan retirement income for women.

Determining Who is a Constrained Investor

How a client with $1.4 million, who requires $6k per month in retirement, is determined to be a Constrained Investor.