Perspectives:  PwC’s $ecure Development Platform - A RIIA® Partnership in Action

Most financial research draws on what the RMA® curriculum terms as the “Traditional School” – an approach that relies on statistical and probabilistic methodologies based on historical capital markets data.  The traditional school of financial research is the foundation for many of RIIA®’s thought-leadership award-winning papers published in the Retirement Management Journal® (RMJ®).

Uniquely, RIIA’s “View Across The Silos℠” perspective helps members approach problems from established as well as new directions and thus generate differentiated best practices.

An important limit of the traditional school is the use of past trends to predict the future.  This is a weakness because trends and extrapolations do not provide an underlying understanding for “why” things are happening the way they do.  Regressions and correlations are not causation.  As Dr. Tim Garrett, Professor of Atmospheric Sciences at the University of Utah, points out, Monte Carlo Simulations are great — provided the underlying conditions aren’t changing.

In the 2015 spring issue of the Retirement Management Journal we published our first paper on what we term the “Agent-based Simulation” school of financial research.  This is a new school of financial research that extends our capabilities beyond the limitations of the traditional school.

This new school of financial research was pioneered by Anand Rao and his team at PwC.  The analytical platform that embodies their work is called $ecure.  It is a software platform that enables the development and delivery of:

- analytical services for institutions, and

- advisor-facing (as well as client-facing) retirement planning applications.

Agent-based simulation extends the traditional school’s use of statistical and probabilistic methodologies based on capital market data by adding Household Balance Sheet℠ (HHBS℠)-based simulation methodologies anchored in client behavior data.  The methodology places client behavior, instead of market data, at the center of the analysis.

Agent-based simulation gives us the ability to go beyond the limitations of developing hypotheses, findings and theories based on market history.  Retirement researchers can now discover networked, non-linear hypotheses, findings and theories using both market history and life-cycle models of all client types.

In the RMJ paper, PwC’s agent-based simulation of the 4% rule revealed a new and important finding: the sequence of consumption risk (SOCR). In retirement planning, sequence of Consumption Risk exposures should drive Investment Risk exposures instead of the other way around.

SOCR is an example of how agent-based simulation reveals the “what,” as well as explains “why.”  These models help us understand how things happen and allow us to test why they happen by trying to prove the model wrong.

When I became the client in 2001, I recognized intuitively that it was the behavior of my liabilities that was dictating me how to invest my assets, not the other way around.  See RMA Client Book.

Underscoring the importance of the agent-based simulation approach, RIIA’s Household Balance Sheet and our partnership with PwC, fifteen years later we have the analytical tools to understand this intuition.

To learn more, join us for the Summer Conference and listen to Anand’s presentation.

Comments

  1. says

    You can also read the paper directly from the PwC website:

    https://www.pwc.com/us/en/insurance/publications/80-percent-rule.html

    Note as you read the paper:

    RIIA’s concept of fundedness can be quantified using three categories of generic measurements:

    - C/FC (average annual consumption in retirement divided by current financial capital) and its variants (e.g. FC/C, C’/FC, PV(C)/FC, etc.
    - A/L (Net Present Value of Assets divided by Net Present Value of Liabilities)
    - Salary Replacement Ratios (The 80% rule, etc.)

    Barry Sacks, who studied Quantum Theory before he became a lawyer - and later an expert in reverse mortgages, once told me over a beer on porch of the CYC that the Quantum View of the World can be summarized in two bullets.

    To paraphrase:

    It the way we look at things that determines what we see, the act of measurement sets a chain of follow-up events in motion, making some possibilities happen and closing others.

    Adding up the “reality” from different measurements will not create a unified, consistent world view.

    This applies here as well because we apply these measurements as best fits different types of clients in order to see different paths through the Procedural Prudence map.

    http://riia-usa.org/wp-content/uploads/2016/01/Proceedural-Prudence-Map.pdf

    For instance, a group of RMA Graduates is currently looking at the various measures of fundedness to determine the nature of the impact of HECMS on fundedness…

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