Change, even good change, can be daunting. And change
usually comes with reservations. After all, if you are accustomed to doing
things a certain way, and that way has worked all right, it’s hard to be
enthusiastic. If it isn’t broke… right?
Today I want to talk about a new strategy to implement with
your clients – The Income Alpha Strategy. If you give it a chance, you might
just find that your old strategy might actually need some fixing.
It’s natural to have reservations about trying a new strategy. You’re probably wondering:
- Will it work?
- How does it benefit my clients?
- What will it mean for my overall business?
And, if you follow my blog, you might also be wondering why it’s worth making a change. Let’s walk through the Income Alpha strategy and discover how it produces more income with fewer assets while creating a legacy account for the family’s beneficiary. And those are just the obvious benefits.
Less obvious is the totality of the strategy. It enhances
your client’s retirement income and builds your business. Are you ready? Let’s
take a closer look at those less obvious benefits. Stick with me – it’s going
to get a little technical so you can really understand the nuances of what
makes this strategy so effective.
1. Increased Tax Efficiency
The Income Alpha Strategy uses guaranteed income which
allows a planner to be more aggressive with the other assets. Guaranteed income
allows for higher equity allocation which in turn creates embedded tax
efficiencies due to the long-term capital gain structure. Since the entire
portfolio is not dedicated to income generation, the allocation allows for
income distributions from mid-cap and small-cap investments after longer holds.
The capital gain taxation versus short-term gains in distributions reduces the
tax load for the income portion later in life.
In addition, the overall wealth creation of Income Alpha means that this bucket of funds does not need to be distributed until the death of the income recipient. It’s worth noting that if it is needed before the death of the clients, this too will likely have long-term capital gain treatment. If held to death, the beneficiaries will receive a step up in basis to the fair market value of the stock portfolio on the date of death. Because these funds are not held and positioned for the systematic withdrawal for income, the portfolio can be more tax-efficient to the heirs.
2. Ability to Address Other Risks
Since we have developed income with fewer assets, this allows the client to do one of two things. They could place funds in a long-term account to grow as discussed above. Or, we can change the conversation and address some of the other risks that might negatively affect the retirement income stream. Namely, the potential risk of long-term care can be mitigated. Using an asset-based long-term care solution, the client places some of those non-income producing assets into a tax-deferred vehicle with additional benefits for a long-term care event. The care benefits are received income tax-free, even when it is distributed from the tax-deferred accumulation. That changes the growth in the account from tax-deferred to tax-free in the event of a qualifying event.
3. Minimize Both Investment AND Longevity Risk
In a recent article, Professor William Sharpe, economist and Noble Prize winner, discussed the two major risks for retirees – investment and longevity. With Income Alpha, the equity holding account is not subject to the sequence of return risks. This allows the lump sum to be more aggressive without the fear of sequence of returns.
In addition, the placement of guaranteed income increases
the level of income that will not stop during the clients’ lifetime. While not
completely eliminating both, you are addressing and minimizing both.
Conventional portfolio indicates that you typically can only address one or the
other. (Source: Barrons)
Bonus Content – Income Alpha
Get straight to the numbers! Download the visual case study on how to win the retirement game.
What’s in it for me?
Using an Income Alpha strategy benefits your client in many
ways. And even if that’s all it did, it would put you, as the planner, in a
great position. There are, however, benefits to the practice as well. Let’s look
at a few:
- Income Alpha can increase referrals. Your clients are not likely to see this type of innovative income planning strategy (i.e. one that generates income and uses fewer assets) from the competition. This will win you the business and give your clients a great story to share with their friends. And, since they are coming from your existing base of target clients, they will be the right referrals for your emerging High Performing Practice.
- Client persistency. By successfully changing the conversation and addressing other retirement income planning needs, you have increased the chances of client persistency. Every product or additional service you offer strengthens your relationship with your clients. The additional brand recognition will pay dividends for your firm.
- Growth of AUM. Taking pressure off the income assets and creating a wealth account will likely lead to long-term growth of assets under management. And, with increased long-term assets under management, you are likely making your business more valuable to a potential buyer in a planned succession plan. While most planners are using systematic withdrawal that creates a discounted multiple because assets are scheduled to diminish, you create a negotiating point for more value.
- Client Peace of Mind. With more guaranteed income, there is typically greater peace of mind for the client. Your service requests and annual reviews will be less volatile and there is less chance for frustration, confusion, and missed expectations. Instead, you’ll be able to replace those negative reactions with a positive experience.
Think different; look deeper; plan better.