The Need for New Models

The Need for New Models

Every few years, an economist wins an award for new money management strategies based on an algorithm. To date, many of these models have focused on the general principle of the bell curve. In numeric terms, 95 percent of market returns fall within two standard deviations of the mean.

At the Society of Financial Service Professionals 2019 FSP Institute, the new models focused on the other 5 percent. These returns – outside that bell curve – can be devastating, especially when combined with a longer life expectancy.

Let’s break it down. Managing a client's assets is difficult enough, but longevity breeds uncertainty. We know that clients either need significant assets or a low withdrawal percentage to sustain their retirement income stream. But both of those solutions assume a normal sequencing of returns. If they see significant negative returns, especially early on in retirement, it can devastate a portfolio. And the longer they live, the greater the likelihood they will experience an event outside of the normal bell curve.

Which brings us back to the models. New models, as they should, now include risks that fall outside the typical bell curve. The risk is simply too great to assume our clients will be in the 95 percent. And this risk factor – the unknown – is the main reason we continue talking about guaranteed income:

If a return-based portfolio fails, it is catastrophic. If a portfolio fails with guaranteed income, it is not catastrophic.

As we build client portfolios, we should maintain a deep focus on that 5 percent. The success or failure of our client's portfolio may depend on it. In theory, the odds of a financial crises are rare. The probability of these once-in-a-century events happening while in our retirement years is statistically slim. It all sounds reassuring.

And yet, three have happened in our lifetime. No matter how large or small your client perceives it to be, transferring this risk is critical to the success of retirement income plans. Factoring in the severity of these events will produce a more realistic view of how the portfolio will sustain itself.

In previous blogs, I've discussed the speed of today’s technology and the co-dependency of global economies. Financial markets are complex and can change rapidly. Despite the odds, it makes the risk of another Black Swan type of event very real. If that event comes at the wrong stage of retirement, it could be catastrophic. Timing is everything, and since we can’t predict the future, we must recognize that those returns might happen, then plan for them.


Winning Strategy: Look at not only the severity of market events but the timing. Consider the new models to portfolio management in producing income with longevity concerns in mind.


About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at