“No Portfolio is an Island” Because All Portfolios Trace a Specific Path on RIIA®’s Procedural Prudence Map℠

“No Portfolio is an Island” is the name of a paper by David Blanchett (Morningstar’s Head of Retirement Research) in the May/June 2015 issue of the CFA Institute’s Financial Analyst Journal®.

In this paper, Blanchett advocates a “total wealth” perspective and a household perspective in the development of investment portfolios for retirement clients.  As you will see, this is a special case that we can trace among the many process steps and item choices available on RIIA®’s Procedural Prudence map℠.

In a 2016 presentation of the paper, Blanchett articulates four “Total Wealth Components (for a Household)” as follows:
– Tradeable Assets, Financial Capital and matching Liabilities, Goals
– Non-tradeable Assets, Human Capital and matching Liabilities, Consumption/Savings
– Non- tradeable Assets, Housing Wealth and matching Liabilities, Mortgage
– Non-tradeable Assets, Pensions Wealth and matching Liabilities, Retirement

In this view, the optimal total wealth portfolio for the retirement client’s financial assets becomes a completion portfolio that takes the other three components into consideration.

The paper’s focus is on building an efficient income portfolio, in contrast to the traditional focus of building efficient total return portfolios.  Simplifying the estimation of the retirement liabilities by using a financial valuation formula – as contrasted with alternative choices in the Procedural Prudence map such as creating present values from the client’s retirement budget or using observed values in the client’s household balance sheet – keeps the computation in the realm of mean/variance mathematics. Results, however, appear inconsistent with traditional Modern Portfolio Theory (MPT) results, making efficient income portfolios appear below the traditional efficient frontier and suggesting that there is no single, income efficient portfolio for all investors.

RIIA has been advocating since 2005 and its founders since 2001, that retirement portfolios are indeed different from traditional investment portfolios.  RIIA’s mission to discover, validate and teach the new realities of retirement is delivered in many ways including the RMA® Curriculum, the peer-reviewed RMJ® papers and the VLC webinars.  It is also summarized as the one-page, Procedural Prudence map.

We agree.  No portfolio is an island.  We can also expand on this point by using, at a minimum, the Household Balance Sheet View℠.  No portfolio is an island because all Financial Capital portfolios fit as completion portfolios in a complete view of the client’s household balance sheet.  We can also trace the matching and specific retirement planning steps in the Procedural Prudence map, thus enabling the creation of a Retirement Policy Statement℠ for the client.

Each retirement planning step in the Procedural Prudence map is a “level of service.”  RIIA surveys the use of levels of services in the Procedural Prudence map.  The current surveys use a list of 86 general categories of levels service, that include the four components used in Blanchett’s paper.

During our Summer Conference in Salem (July 18/19), we will provide the survey results by levels of services.  RIIA Members have access to the line item details and can download the related pdf and PowerPoint material from the members-only website.  Join RIIA now.  Join us at the Summer Conference in Salem.  Register for our next RMA online course at SSU.

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