Case Studies

Our clients were in the midst of selling a business and moving into retirement within the next year or so.  They had a good nest egg and would receive final payments on the sale of their business within two years.  Unfortunately, they had several negative experiences with prior financial advisors and had taken to a “do it yourself” investing approach in the midst of the Great Recession.  Most of their holdings were short term CD’s and low yielding cash.

The “do it yourself” approach had delivered disanointing results and low yielding investments were not going too deliver the returns needed to fully fund a comfortable retirement.

In a nutshell, this would become a process of overcoming the negative experiences with advisors in the past, building trust, educating around the benefits of Evidence Based Investing and overcoming behavioral biases around capital markets and managing risk.  The end game of achieving predictable cash flows to fund lifestyle and travel would become our focus.

Our process begins with planning and to create clarity in a client’s future, we often need to understand the unique experiences in their past.

We began by gathering tax returns, estate planning documents, insurance policies and started working on what their true needs for cash flows would be for decades to come.

As a first step in our Discovery Process, we determined that their lifestyle funding would fall well short with the expected returns from CD’s and cash.   Discussions began regarding a high quality bond ladder accompanied by modest exposure to a highly diversified portfolio of low cost global stock funds.

For the bonds, we turned to BlackRock and their iBonds Exchange Traded Funds (ETF’s).  Each ETF consists of hundreds of investment grade bonds maturing in a specific year.  BlackRock is the largest bond manager in the US and their low cost of this series of  maturing bond ETF’s makes them a great fit when planning for precise cash flows in retirement.

Next we turned to our long time strategic partners; Dimensional Fund Advisors (DFA) for a low cost, tax efficient, diversified, global portfolio of stocks.  DFA funds are not accessible to most investors and their academic approach to investing has provided consistent results for decades

Not every client who walks in our front door gets the standard 60/40 stock and bond portfolio delivered to most retirees by the many advisors.  Why take the risk of investing 60% of a portfolio in stocks when capital risks and income certainty can be managed more prudently with 50% or less in stocks?

Next, we established that there was longevity on both sides of the respective families and began planning for an estimated life expectancy of 100.  The worst time to run out of money is late in retirement so we insist on planning for longevity.

Most people laugh when we tell them that the risk of living to 100 and beyond is simply too great to be ignored.  After the chuckle, we share real life stories of existing clients that are well into their 90’s and still going strong. One advantage of advising clients for over three decades is that we often know the risks of what our clients will face in the future better than they do.

Longevity is a risk that can be managed but, if ignored, can leave clients under financial duress at just the wrong time.

Next we began to build cash flow scenarios with traditional capital markets assumptions and the picture that emerged was a bit too rosy for our tastes.  Many of America’s most respected capital market experts  like Vanguard founder John Bogle and BlackRock CEO Larry Fink echo our concerns that future expected returns could be muted for a decade or more.  Muted returns equal reduced projections so back to the drawing board we go.

Even though many financial planning programs use historic returns as the basis for projections, this leaves us feeling uncomfortable given our experience during  “The Lost Decade” (2000-2009) and “The Great Recession.”

Sequence of returns  risk (Insert Link: can pose an insurmountable obstacle if not addressed properly and upfront before one dollar is invested.  If someone retired in February of 2008, assumed returns on a moderate risk portfolio inside most financial planning software programs would assume a return between 7-10%.

Clearly, the downturn between February 2008 and March of 2009 would have left the average investor with a 20-30% decline in their assets.  Not good for someone who just retired  and not good for long range spending needs.

In our opinion, it is most crucial to fully fund the first few years of retirement lifestyle with a guaranteed income stream that will not be compromised.  Given that these clients were just about to turn 70, we used a bond ladder to fully accommodate both lifestyle and taxes for the next five years.

In other words, we do not care how the stock market behaves for the first five years of their retirement.

Next, we began an in-depth discussion of capital markets and the facts behind how they operate.  Most advisors the client had engaged in the past were actively trying to beat the market and delivered just the opposite with sub-par returns, high management costs and little tax efficiency.  Our approach is based on buy and hold, disciplined rebalancing, low turnover and low costs.  Our focus is to provide the returns of the market without excessive risks.  DFA helps us implement strategies that favor small and value stocks that have traditionally outperformed major indices.  Our approach is commonly referred to as “Evidence Based Investing” or “Index Fund Investing.”

As we explain to our clients, attempting to beat the market with high priced mutual funds and managers is simply a loser’s game and the data proves our point.  It is wise to accept the returns of the market rather than pursuing potentially higher returns with high costs and more risk.

Within a few months we constructed and implemented a modest risk portfolio that now allows the client to sleep at night knowing their retirement is fully funded.  The key drivers behind the success of this advisory relationship is our thorough vetting process revealing negative experiences with past advisors, coupled with a long term plan for funding future cash flows with a high degree of certainty.

It is not unusual for prospective client’s to come to us having had negative experiences with former advisors.  Often these folks have missed and entire upward cycle in stocks and, almost invariably, they have incurred high fees along the way.  In short, they feel betrayed by the financial services industry.

We are strong believers in the Pareto Principle which leads us to conclude that 80% of the advice offered in the financial services industry is conflicted, costs too much and is likely to deliver inferior results.

Our clients in this real life scenario are now confidently pursuing an active lifestyle in retirement.

At the end of each day we want to know that we made a positive, significant and lasting impact for these clients and every individual and family we serve.