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Sorting Through Conflicting Financial Advice

When Francois Gadenne left the professional ranks of financial services and became a high-net-worth consumer of retirement planning advice two decades ago, the founder of the Retirement Income Industry Association (RIIA) noticed that the advice he received was inconsistent, sometimes even contradictory.

Most of us are already familiar with some of the common contradictions in financial planning. For instance, we’re told that the market’s past performance is no indication of its future returns. Yet most projections of likely future returns depend on analyses that rely, in one way or another, on historical performance.

Under such circumstances, how could a client become well-informed about income planning, and how could he or she decide what the best strategy might be? And, if there are no bedrock principles or unified theories of retirement income planning, what can an advisor recommend with any degree of confidence?

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This problem bothered him 20 years ago, and it still bothers him today. A big part of RIIA’s mission, especially after it developed the Retirement Management Analyst (RNA) designation for advisors, has been to establish a “body of knowledge” and “best practices” in the field of retirement income planning.

Need not be hard to develop your own sound strategy

Ostensibly, it should not be that hard to develop a solid financial strategy for retirement, assuming, of course, that you have the wherewithal and discipline to put adequate funds to work and consistently follow your plan.

Until most people are nearing retirement, they should put roughly 60% of their liquid assets into diversified stock funds or ETFs, including at least one international fund. They should contribute funds regularly, and put most of the rest in a good diversified bond fund or funds. As retirement approaches, they also should consider adding to the mix an annuity with a guaranteed lifetime income rider, especially if they have a hard time staying the course in bear markets.

There are reasonable alternatives, however, depending upon the particulars of your life and/or major unexpected events. This is not the problem. The problem is that there is no shortage of counter-advice out there, making it harder to decipher the best path forward. This is why it makes sense to be aware of best practices in financial planning, if only to help buttress the strategy you have chosen in hard times.

RIIA’s eclectic group of members, including public policy experts as well as financial advisors, do not agree on best practices. Some dislike annuities, for instance. Others like annuities but differ strongly on the timing of annuity purchases.

Gadenne recently raised this issue during his presentation at RIIA’s 2017 Summer Conference in Salem, Mass.

Common disputes

Most of us are already familiar with some of the common contradictions in financial planning. For instance, we’re told that the market’s past performance is no indication of its future returns. Yet most projections of likely future returns depend on analyses that rely, in one way or another, on historical performance.

There are also controversial contradictions. Jeremy Siegel, a finance professor at the Wharton School of Business at the University of Pennsylvania and a financial planning expert, and many others have told us that stocks pay off in the long run.

But Zvi Bodie, a Boston University professor and investment strategy expert, and others say that this is nonsense, Stocks are more volatile than bonds, Bodie points out, and their volatility only compounds over time, compelling many people to trade in and out of them, to their detriment.

“Time, on average, decreases risk over the population average; but, for any given individual, time increases risk,” Gadenne says. “[This] may temper the inclination to advise a client to hold equities if they have a long planning horizon or to hold bonds if they have a short-term planning horizon.”

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Three primary schools of thought

RIIA has a big-tent kind of membership philosophy, and Gadenne doesn’t take sides in these controversies. But he assumes that advisors do, and he’s come to the conclusion that they follow three basic schools of thought. As he and Patrick Collins wrote in the latest issue of Investments & Wealth Monitor, the magazine of the Investment Management Consultants Association (IMCA), most advisors will either be “curves,” “triangles,” or “rectangles”.

He and Collins refer to these geometric symbols, respectively, to describe investment advisors who 1) focus primarily on investment management and who rely on Modern Portfolio Theory as a guiding principle, 2) incorporate behavioral finance into their advice and align investments with their client’s personal goals and aspirations, and 3) incorporate all of a household’s assets and liabilities into each retirement income plan. (Behavioral finance, a relatively new field, seeks to combine behavioral and cognitive psychological theory with conventional economics and finance).

Gadenne believes that smart advisors will match the right techniques to the right client or at least specialize in certain types of clients, Gadenne says. In other words, he believes it’s mostly just a matter of proper fit between an advisor and a client, which is not difficult to achieve.

What is best for you, the individual investor? As previously noted, start by embracing the conventional wisdom of building a portfolio composed mostly of stocks and bonds, weighted more heavily to the former. If you find an advisor who wants to dress this up in certain ways and you agree with their thinking, then consider pursing that route with them.

If not? Stay the course, and you’re highly likely to do relatively well over time if you treat contrary strategies as unwelcome noise.


Steve Kaufman contributed to this article.

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