The Three Disruptions – The Fiduciary Rule is a Symptom of a Fundamental Demographic Cause

Based on RIIA®’s 10 years of experience with clients, advisors, executives and regulators, we observe that when we reach near-retirement age, most of us sense that retirement planning is more than “same-old-same-old” investment management, more than “better asset allocation,” more than “new labels on old wine” and more than just “talking-the-talk.”

Retirement management is a set of fundamental personal disruptions that the demographics of the boomer generation have turned into a set of fundamental industry disruptions (See 2016 RMA® Practice Manual for details and definitions), including:

  • The First Disruption: Clients are the bedrock of the industry. The risk profiles of investment clients are well documented.  The risk profiles of retirement clients are documented in the RMA curriculum (Sign-up for online course).  They include the risk profiles of investment clients but they also include new risks.  In particular, the risk profiles of retirement clients include a category of un-systematic, client specific “Chance” risks (e.g. Longevity, Healthcare Costs, Household Shocks) that cannot be diversified away in the capital markets.  These additional risks mean that retirement management cannot be a “single cylinder” risk management engine based on “risk retention”/diversification/asset allocation.  This means that retirement management, as shown in this curriculum, must become a 4 or even a 5-cylinder risk management engine that includes risk “retention”, “pooling”, “transfer”, “avoidance” and as added to the list most recently, “barbelling.”
  • The Second Disruption: Business models are foundational building blocks for an industry. Successful business models are anchored in the bedrock of the Clients’ needs, wants and behaviors.  The business model of retirement management is different from the business model of investment management.  The business model of investment management is “gathering assets under management (AUMs).”  The business model of retirement management is “paying a monthly check.”  This difference is fundamental and ripples through the value-chain of the Financial Industry, causing a cascade of other disruptions that makes it impossible to “do” retirement management as a small adaptation to investment management.  Retirement management is not a 20% change to the business model of investment management, it is a 10X change to the business model of investment management. Incremental thinking and adaptions will not “move the needle.”
  • The Third Disruption: Traditional investment management is a special case of the larger financial framework that has been developed and formalized since the 1950s.  The larger framework considers both Wealth and Consumption from Wealth.  Traditional investment management focuses on growing Wealth. Retirement Management as a “monthly check” re-introduces minimum consumption in the financial equation and explores its consequences, starting with the impact that it has on our primary advisory goal for the client.  The goal of investment management is to expose the client’s wealth to upside potential subject to a risk profile.  The goal of retirement management is “First Build a (minimum consumption) Floor, Then Expose (to wealth growing) Upside.”

It is in this context that we see the DOL’s Fiduciary Rule as a symptom of a greater cause: A fundamental shift in the center of gravity of the Financial Industry from selling expectations to planning outcomes because more than 10,000 boomers are retiring every day and will be for many years to come.

The distinctive value of using “First Build a Floor, Then Expose to Upside” as an easily memorized goal that is more than “new labels on old wine” and encapsulates what to do with these fundamental disruptions in our industry is not to imply zero-risk or risk-free exposures for retirees.  Instead, its value is to help us extend our view from a traditional “upside” focus on concave client exposures (seeking an expected return with long exposures to risky assets whose un-systematic risk can be reduced by diversification in the capital markets) to this upcoming and rapidly developing “flooring” focus on creating convex client exposures to the wider range of systematic and unsystematic risks that affect retiring and retired households.

To learn more about this and what you can do about it, join us in Salem, MA for RIIA’s Summer Conference (July 18-19) and/or register for the September RMA® Online Class at Salem State University.

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