Perspectives: Complete Advice

A decades-long observer of the financial industry asked after a presentation of the RMA®’s Household Balance Sheet and the Retirement Allocations if traditional investment advice is bad advice for retirement.

Because Retirement Allocations include traditional investment advice (Upside Portfolio) as one of the four risk management techniques, our answer is always as follows:

Traditional investment advice is not bad advice but it is incomplete advice when it comes to retirement.

Traditional investment advice (asset allocation) is a one-cylinder risk engine because it uses a single risk management technique:

- Risk Retention by the client defeased through diversification.

RIIA’s Household Balance Sheet View shows that retirement advice must be a four-cylinder risk engine that uses all of the risk management techniques documented by Professor Zvi Bodie and including:

- Upside Portfolio: Risk Retention by the client where the unsystematic risk is defeased through diversification - asset allocation.

- Floor Portfolio: Risk Management of the client’s systematic and unsystematic risk exposures by trading off some of the upside to protect the downside - hedging.

- Longevity Portfolio: Risk Pooling of the client’s unsystematic risk exposures using all types of insurance: Life, Annuities, LTC, etc.

- Reserves Portfolio: Risk Avoidance and the maintenance of cash “cushions”.

It is not sufficient for advice to be integrated. It must be complete.

As discussed in the Role of Rules, incomplete advice would be suggesting a 40-60% portfolio in retirement without an understanding of a clients’ financial position or needs.  For some, it may be excellent advice and for others it might risk their retirement security.

Or as I sometimes like to put it, incomplete advice is like selling three-legged puppies.


Francois Gadenne
Co-Founder, Chairman & Executive Director

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  1. says

    This is a response to David Ehrenthal’s thoughtful comment on the related post on our LinkedIn Group. Yes, the industry is responding to the changes. Why do we know? RIIA is a deliberate creation of the industry, and funded from companies across all business silos, in order to respond to these changes.

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