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The shift from accumulation to distribution is changing the investment industry's dominant business model from gathering assets to writing monthly checks to clients. Clients who once sought probabilistic expectations of returns on their financial assets now seek reasonable certainties of payments from those assets. Success in this environment will accrue to those advisors who act as true retirement professionals rather than to those who take a technician-oriented approach, using tools that build upon but also go beyond modern portfolio theory to solve complex distribution problems.
The larger range and greater complexity of retirement advisory tasks, when compared to investment advisory tasks, is driving the emergence of a retirement management profession.
The Retirement Income Industry Association (RIIA), which was founded on a 2006 charter to help investors in the de-accumulation stage of retirement, has been at the forefront of this transition, designing its own curriculum and certification program to help advisors.
Retirement planning is different from investment planning because it is about responding to specific income needs, not managing probabilistic expected returns. Retirement planning also requires professionals to learn about their clients’ human and social capital in addition to their financial capital. For more on the three types of capital, see Understanding Your Capital.
Retirement planning is not an exercise in illustrating long-term perfection — instead, it is an ongoing effort to discover the most tolerable imperfections. The financial needs of clients will vary from one household to the next, and retirement planning requires far more diagnostic work than mere technical execution.
In the mid-1980s, David Maister laid the theoretical framework for differentiating between professionals and technicians. He was then an assistant professor of business administration at the Harvard Business School as well as the author of Managing the Professional Service Firm.
Maister broke the service industry into three categories, which I have adapted below for the financial industry:
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Brains: Advisors who perform client tasks that are at the creative edge of their practices and deal with unique projects that require fundamentally different customizations from client to client.
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Gray Hair: Advisors who deal with issues that are similar to what they have seen before and consciously work to leverage and to scale up their past experiences.
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Procedural: Advisors who with well-defined and well-specified client tasks seek to deliver services in the most timely and cost-efficient manners.
