Mitigate Risk. Remain Relevant. Serve Your Clients.

In every industry, there’s that one person, that expert, who’s willing to share knowledge for the good of others. For financial advisors working with middle-class Americans, that person is Professor Emeritus William Sharpe.

As he ages, he understands firsthand the concerns he has worked so diligently to help us solve. In fact, many of us still use the Sharpe ratio to gauge performance and risk.

Today, I want to highlight an article published on It documents an interview Professor Sharpe gave about the importance of preparing for retirement, while acknowledging that we’re facing a big problem as we try to figure out how to do it. Understanding what Professor Sharpe has to say, and how to implement it, is an important step to transform to a High Performing Practice.

Let’s pull out some key points and relate them to our clients.

Why retirement income is a difficult problem
Professor Sharpe outlines two risks – investment and mortality. He points out that you can eliminate one but not the other. And, there are so many potential outcomes, especially when you have two people, that it’s extremely hard to know which scenario to plan for. These uncertainties create a problem that is difficult to solve without the use of an annuity portfolio.

Potential for employer involvement in the future
Like Professor Sharpe, I would love to see more programs, education and options in corporate benefit plans designed to help Americans retire more securely. There is currently a lot of talk around The Secure Act that would allow guaranteed income in some plans. And, even this partial step to a more secure retirement doesn’t come without costs in the planning process. The loss of stretch provisions above $400,000 takes away flexibility in the overall planning process. At the end of the day, the discussions around The Secure Act should at least provide additional validity to the proper use of guaranteed income in retirement income portfolios.

Oh boy — that’s a big issue
Yes, I’m talking about Social Security. But I’m less concerned about the funding of Social Security. Even with the rise in benefits and the lack of additional funding to date, there are alternatives to correct the trust fund’s balance and provide security to many Americans for decades to come. All it would take is a few tweaks. Urgency is important in the legislative process but unlikely due to the political nature of this subject.

The real issue of concern is the continued misuse of Social Security. Even with the immense amount of education over the last several years, the election rate for maximizing benefits at age 70 is very low. For those advisors wanting to provide value to their clients, leveraging Social Security’s guaranteed income with inflation protection is critical to the success of many middle-American retirement income portfolios.

Professor Sharpe points to a basic premise in investment management – diversification. This technique mitigates the investment risk by pooling it. Annuities pool the longevity risk. And, if you pool the investment risk during the accumulation phase, why wouldn’t you continue that practice during the income phase? The article states that longevity risk is at least as big a concern as investment risk.

Today, there continue to be specialists in insurance and investments that do not collaborate. Going forward, as our products merge, we must learn to collaborate or implement different products into our planning process. There are advantages to both. If the two biggest uncertainties are investment and longevity, there is a place for both.

Professor Sharpe states that he did all this research for free because it was of interest to him. As he ages, he likely faces the same risk most Americans do.

Remaining relevant with our clients is paramount to our long-term success as planners and business owners.

Making sure that we are aligned with the changing demographics and offering solutions to meet the future needs of Americans allows us to remain relevant with them and with the industry.

Next Steps
Read the original article. Think about how retirement income planning will be relevant in your practice over the next 10-20 years as your clients age.

Transformational Tactic

Having solutions that mitigate more than investment risk will provide more opportunities to serve clients.