The much-discussed fiduciary rule was, among other things, an unintended gift from the Department of Labor to advisers, particularly those who focus on income-distribution planning.

There are several reasons for this fortuitous silver lining. Chief among them is the fact that retirement income is one area where advisers can most easily demonstrate a clear distinction between themselves and traditional, accumulation-focused advisers. This is not to say that “accumulation focused” advisers don’t build portfolios with retirement income in mind. They frequently do. But I’m referring to transitioning one’s practice to the still niche market of outcome-focused income planning. Why? Because this is the ideal market to commit to if you wish to sidestep the inevitable commoditization of advice and products that the DoL brings forth. You should be concerned about this.

In an essay for the Wall Street Journal entitled Competition is for Losers, venture capitalist Peter Thiel wrote, “If you want to create and capture lasting value, don't build an undifferentiated commodity business.” He elaborated, writing: "Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place."

The article was adapted from Thiel's new book, written with Blake Masters, Zero to One: Notes on Startups, or How to Build the Future, to be published by Crown Business in September. Consider Thiel’s description in the context of the DoL and where the new fiduciary rule intersects with technology. It’s at this crossroads where the pressure to lower prices is most obvious. This is the point at which you’ll find interesting new business offerings.

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I would argue that when working with constrained investors, risk mitigation will be a critical factor in an adviser meeting the requirement of a fiduciary duty. It’s not enough to lower investment fees.

One that comes to mind is Schwab Intelligent Portfolios, an online investment advisory service.
The Schwab advisory service will build an ETF portfolio with up to 20 asset classes, as well as provide tax-loss harvesting on minimum-sized accounts and offer sophisticated portfolio management. The cost of all this service: Nothing. According to Schwab’s website.

In citing this example, I’m not saying that financial advisers will be forced to give away their investment advice. However, I am saying that DoL combined with technological advances will alter the competitive landscape and create pressure that substantially compresses fees to a degree that it could threaten advisers’ lifestyles. Such a market is not the ideal one for an adviser to try to compete in. This is why I urge advisers to move up the value chain where margins will not be as compressed by shifting your practice to income planning. Moreover, recommend that advisers focus a specific segment of customers referred to as “constrained” investors.

Who is a “constrained” investor?
Think about your prospect or client who has accumulated a retirement nest egg between $250,000 and $750,000. They have savings, which is good, but here’s the key: the amount of savings they accumulated is not a lot relative to the amount of monthly income they desire. In fact, their savings is just enough, or maybe not quite enough, to generate the level of monthly income the client is looking for. This investor has little or no margin for error. He or she is constrained by definition, and would benefit from an “outcome-focused” retirement income investing strategy, which is designed to create a highly predictable retirement income.

A successful income strategy for constrained investors must elegantly blend asset management and insurance. This is key because blending these disciplines is the formulation for mitigating big risks that can devastate the retiree’s financial security. In fact, I’d argue that when working with constrained investors, risk mitigation will be a critical factor in an adviser meeting the threshold of post-DoL fiduciary duty. It’s not enough to lower the constrained investor’s investment fees. It’s just too easy to imagine a retiree going broke in retirement in spite of having an investment portfolio that featured extremely low costs. We have to be better.

Planning for key risks including the “big three” (timing risk, inflation risk and longevity risk) is a first-order responsibility of the income planner. This is the area where the DoL missed the boat. And it’s why, when working with constrained investors, advisers must move beyond a probability-based worldview in favor of one that’s outcome-focused.

Managing timing, inflation and longevity risks
Simply picking a bad year to retire, say 2000 or 2008, could dramatically diminish a retiree’s financial security. The outcome-focused income planner will take care to help the retiree mitigate timing risk. This is rather easy to do. Allocating assets to safe money buckets so that predictable monthly income may be provided over the first 10 years of retirement is the ideal way to mitigate this risk. There’s another big benefit, a psychological one, that emerges when the income planner does it this way. When the investor is confident that his or her paycheck will show up in the mailbox each month, it becomes much easier for the investor to remain invested in equities through all market conditions. This staying-power is the key to mitigating inflation risk. Next, adding an income annuity to the strategy, often with the income benefit deferred for ten years, is a surefire way to mitigate longevity risk.

What’s important to keep in mind about constrained investors is that their needs are only best served when insurance is brought into their investing strategy, and when their belief in long-term participation in the equity markets translates into acting on that belief. In general, this won’t happen unless the adviser views risk management as his or hers first and most important obligation.

David Macchia

David Macchia

David Macchia is founder and CEO of Wealth 2k, a consulting and software company.