Silver Tsunami: Bringing Institutional Investing to the People

It is no secret that the financial services world is in the midst of an arms race to service Baby Boomers as they enter the next phase of their investing lives.

For decades now, many in the industry have built their businesses by helping their Boomer clients accumulate wealth. Now, as Boomers begin transitioning out of the accumulation phase and into the distribution phase, the industry is itself in a transition period as it tries to service the new needs of existing clients—or lure new clients away from competitors.

Nonetheless, there is a sense among some advisers that the industry has actually been slow to catch up to the changing winds. The hope is that the approaching distribution period—when Boomers will be looking for a steady income that replaces their paychecks—will lead to innovation within the financial services business. Or more specifically, the hope is that there will be some kind of competition to the insurance industry’s grip on the retirement income space. So far, though, little has been presented in the way of solid new solutions to compete with annuities.

The ‘Bond Bridge’

Enter Asset Dedication, a “portfolio engineering” firm from Mill Valley, Calif. Acting as a sub-adviser, Asset Dedication builds portfolios using a liability-driven method that has almost exclusively been utilized by institutional investors. The portfolio is divided into three accounts—income, growth and cash. Using what it calls “bond bridge” technology, the firm builds a defined income portfolio consisting of individual bonds that are meant to provide for near-term income needs (about five to 10 years). In other words, it will replace an investor’s paycheck similar to the way an annuity does. The rest of the portfolio will mostly consist of the growth portion, made of equities and other long-term capital gains investments. The minimum account balance to use the portfolio is $100,000.

Brent Burns, founder of Asset Dedication with Stephen Huxley in 1999, says the cornerstone of the firm’s investment strategy is that it is “straight out of the institutional pension” investing approach. Although Burns and Huxley began developing their strategies in the late 1990’s at the University of San Francisco School of Business, the biggest challenge they faced was technology. The processing speed was just too slow and they couldn’t run their various scenarios fast enough. They also lacked the bond inventory to make certain their portfolios didn’t contain any gaps in them. More recently, the firm ran into the challenge of industry inertia.

“Most advisers have been talking about total return. But once you’re in the withdrawal phase, it’s a different environment,” Burns says. “They have to talk differently.”

One of the important components of the investment approach is figuring out the client’s cash flow needs. These cash flows are not subject to interest rate risks—so even if the value of the portfolio fluctuates, the cash flow does not. In other words, the strategy centers on the idea of generating predictable income. Which, of course, sounds a lot like what an annuity does.

“Part of the challenge for the annuities is that they lack flexibility and they are more expensive,” Burns says. “They have to layer on expenses and management fees on top.”

Burns believes that a benefit of his firm’s liability-driven portfolio is that it is integrated into the actual financial planning process. He argues that many high-net-worth investors are less interested in annuities because they want a more sophisticated approach to managing their income in which they have control over the investment process.

“One thing with the annuity is that you will always give up the strategy,” he says, referring to the fact that once an investor purchases an annuity, their money is essentially locked up by fees and penalties should they want to access it before age 59-1/2.