MAKE A SMART DECISION:

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1 MAKE A SMART DECISION: Help your clients better prepare for the future A discussion with Harold Evensky on managing retirement assets By James Carney Did you know that 10,000 Baby Boomers turn 65 every single day? That s an incredible number and it is going to continue like this for the next 19 years. While retirement has always been touted as a time to relax and really enjoy life, many of the Boomers I speak with are worried that they may outlive their savings. A dismal economy and volatile stock market continue to fuel these fears. As your clients financial quarterback, you can help put them on the right course especially if you provide advice on all of their assets, including the portion typically held in retirement accounts. Earlier this year, we looked at five ways to increase your AUM by attracting assets held in retirement accounts (see Will it be a Baby Boom or Baby Bust for you). I recently spoke with Harold Evensky, President of Evensky & Katz in Coral Gables Florida, to understand his perspective on strategies for managing retirement assets. 1 With roughly half of our clients in retirement, says Harold, and another 20 percent approaching it within five years, retirement planning is a big part of our job. For Harold, it all boils down to these four points: 1. Don t try to maximize returns, maximize the probability that your clients will achieve their financial goals. 2. Follow a five-year mantra. 3. Keep abreast of changes on the retirement planning horizon. 4. Take advantage of tools to support holistic planning. 1 The information presented in this paper should not be construed as advice or a recommendation of any kind. You should conduct your own analysis and due diligence based on your specific business needs.

2 Help Minimize the Worry Factor James: Evensky & Katz s business is based on the financial planning process which is driven by a client s goals, constraints and priorities. What is your approach to providing financial advice based on retirement assets? Harold: We are not trying to maximize returns. We are trying to maximize the probability that a client will achieve their goals with the lowest risk possible. This involves an assessment of capital needs and of risk tolerance. We begin by trying to determine what the portfolio balance should be in terms of stocks, bonds and cash to achieve a client s goals, taking into account taxes, inflation and life expectancy. Then we discuss what they can live with in the interim in terms of market volatility. It is easy for clients to say they will take on more risk when the market is doing well, but when things go down they forget and want to bail out. Harold Evensky, CFP, AIF President of Evensky & Katz, LLC Evensky & Katz is a highly-recognized fee-based financial planning firm. In addition to his role as President, Harold has served as Chair of the TIAA-CREF Institute Advisory Board and is a member of the Financial Planning Association, the Academy of Financial Services and the CFA Institute. Over his career, he has received numerous awards and accolades, including being described by several industry magazines as one of the most Influential people in the financial planning profession. Harold is a featured speaker on investment topics at numerous national and international conventions and has written for, and is quoted frequently, in the national press. He is the author of The New Wealth Management and coeditor of The Investment Think Tank: Theory, Strategy, and Practice for Advisers plus Retirement Income Redesigned Master Plans for Distribution, which received the AXIOM business book of 2007 silver medal in the retirement planning category. This yields two possible solutions one being the most efficient portfolio that will provide the return the client needs and the other being the most efficient level of risk they can live with. In most cases, the most efficient portfolio they need to achieve their goals has less risk than what they have indicated they can live with. If that isn t the case, however, we suggest going with the lowest risk option. Let Clients Sleep Well Through Downturns James: How do you manage the volatility risk when people are in retirement? Harold: We adhere to a five-year mantra when it comes to clients that are in or nearing retirement. Simply put, we don t believe anyone should be investing funds they may need in the next five years. Otherwise, they may have to sell at the wrong time.

3 Five years is roughly an economic cycle and there is too much risk the market will be down when they need the money. If someone has $1,000,000 in savings and indicates they want to buy a second home for $100,000 three years from now, we would suggest they carve out $100,000 and put it in a cash flow reserve comprised of short-term bonds and cash and invest the remaining $900,000. If they have $1,000,000 but will need $50,000 each year to supplement their income, we would suggest they only carve out two years since the opportunity costs are too much with five years sitting in a cash flow reserve. We would put $100,000 in short-term bonds and cash and invest the remaining $900,000 in a total return portfolio. If the reserves ran out for any reason, we would dip into the investment portfolio at the short end of the fixed income ladder. This would provide an additional three years of monies without the likelihood of having to take a loss regardless of what happens in the market. When the markets are going up risk tolerance is infinite. When they are going down, it reverts to zero. We replenish the cash flow reserve as we manage the investment portfolio. If we were 50 percent stocks and 50 percent bonds and the market collapses pushing us to 70 percent bonds, in the normal course of rebalancing we would sell bonds and take some of the proceeds to replenish the cash reserve. That s how we manage the volatility risk when people are in retirement and are withdrawing funds. We ve been doing this since the early 1980 s and have never had to dip into that second tier of liquidity. We go through a detailed educational process with clients to discuss the five-year mantra before using this strategy. It helps avoid questions down the road when clients fully understand what we are trying to do in the short- and long-term. Keep Abreast of Changes on the Retirement Planning Horizon James: Do you see your approach to retirement planning changing in any way in the future? Harold: I see two changes coming that will impact how our team operates the increased use of immediate annuities and reverse mortgages. An immediate annuity provides regular, lifelong payments guaranteeing an income flow the buyer can t outlive. It can provide a great deal of safety in terms of survivability of a portfolio. We aren t utilizing them now because the payout is so sensitive to interest rates and,

4 with current rates so low, we don t see any risk in waiting to buy-in. There is also a new form of reverse mortgage available called a federally-insured Home Equity Conversion Mortgage (HECM Saver). Unlike a traditional Home Equity Line of Credit (HELOC), the HECM Saver provides the opportunity to establish the credit line but not draw until and unless the funds are needed and to make payments back on interest if and when you choose, or to even defer all the mortgage interest until a home is later sold or refinanced. We are studying this now but I m reasonably positive it will become an important part of our planning in the future. Among other things that have changed with reverse mortgages is the cost they are substantially less expensive than they had been historically. You can set one up with a modest fee, and when you draw on it the cost of the mortgage works out to about LIBOR plus 2.5 percent a relatively modest cost when you consider the benefit of having a ready pool of capital to tap into when you need it. I believe a reverse mortgage may be a substitute for keeping two years of cash flow reserve. If someone qualifies for the HECM Saver, we could reduce the reserve to six months and tap into the reverse mortgage if necessary. When markets regain their strength, the mortgage can be paid back. Our studies indicate this will significantly increase the survivability of the portfolio in retirement. Take Advantage of Tools to Support Holistic Planning James: It is important to have a comprehensive picture of all the assets a client owns in order to help them create an effective plan. How do develop this picture? Harold: We ve been a long-time user of ByAllAccounts account aggregation service for our clients that have significant held-away assets. This enables us to automatically receive data for positions, balances, transactions and securities that may be in 401(k) and other retirement accounts, or managed by another advisor, so we can see everything they own. Since the advent of account aggregation, I ve been a big believer that it needs to be an integral part of what we do as practitioners because our job is to work with our clients holistically. ByAllAccounts remains the aggregator that uses structured and unstructured data to get the data as accurate, correct and usable as possible. There is another less obvious benefit of aggregation software. In some cases, outside assets may be with a competitor to our firm. The software provides the opportunity to gain insight into what they are doing and we can provide a client with questions to ask the other advisor. While many of our competitors are very good, funds have come to us over time as a result when clients see we can manage the money more effectively.

5 Grow Your Business While Helping Clients Prepare for Retirement Retirement shouldn t be a stressful time financially but it calls for carefully constructed plans that clients stick with for the long term. Given the size of 401(k) accounts, especially for those near retirement, these plans should be holistic in nature and include all assets a client owns, wherever they reside. This provides the complete information required to develop comprehensive investment strategies that reflect both capital needs and tolerances for risk. By combining data aggregation capabilities with sound retirement planning techniques, you have the opportunity to increase your share of wallet by managing held-away assets while putting your clients on the right path to enjoy this next stage of life. About Evensky & Katz, LLC Evensky & Katz is a nationally respected wealth management firm with over 25 years experience, understanding and responding to the unique needs of its client base, which ranges from corporate executives to physicians, entrepreneurs and retirees and Nobel Prize winners. Founded by renowned financial planning authority Harold Evensky, the firm adheres to his principles of client-focused, educated financial advice. For more information, visit or call About ByAllAccounts ByAllAccounts, the financial advisors choice for account aggregation since 1999, is the only service that retrieves, enriches and consolidates reconciliationready account data from any custodian. ByAllAccounts patented aggregation engine, through which hundreds of billions in assets flow daily, aggregates all client account data from any source within an advisor s wealth management platform or trust accounting system for a truly comprehensive view. Thousands of advisors rely on ByAllAccounts to save administrative time and costs, mitigate risk associated with having incomplete information and grow revenues through client referrals and new business development. ByAllAccounts integrates seamlessly with all of the most popular wealth management platforms. For more information, visit www. byallaccounts.com or call

6 Other White Papers You Might Like in the ByAllAccounts SMART Decisions Series: MAKE A SMART DECISION Simplify Your Advisory Business: You wouldn t use an abacus for performance measurement. Why aggregate financial account data mentally or manually? MAKE A SMART DECISION Attract HNW Clients by Adhering to the Fiduciary Standard: Seize the fiduciary standard as a growth opportunity. MAKE A SMART DECISION Gain a Greater Share of Assets: Will it be a Baby Boom or Baby Bust for you? Five ways to increase AUM by managing your clients retirement assets MAKE A SMART DECISION Don t Leave Money on the Table: Billing on Held-Away Assets. Four Reasons Why the Tide is Turning. All rights reserved. Redistribution of this material is prohibited without the express written permission of ByAllAccounts, Inc. MAKE A monthly educational series for DECISIONS ByAllAccounts is committed to helping you make smarter decisions for your practice, your clients and yourself. We have created an educational series based on the experiences of financial advisors who have made smart decisions to solve business problems. Each month we offer a bundle of educational material you can read or watch at your own pace that addresses a specific problem. S implify How can I simplify/streamline my business so I can spend more time with clients? M arketing SMA A sset Growth How can I gain a greater share of wallet (i.e., assets under management)? R evenue Growth What can I do to increase revenue? T ime Management