Wednesday, March 7, 2012

More on CFPs and RMAs

Kay Conheady, CFP®, who operates the very informative CAPE Research Catalog website, and who has written for Advisor Perspectives, provided the following comment at my "CFPs and RMAs" blog entry: 

I'm a CFP (finished experience requirement in 2007).

I didn't hear about the Trinity study until I read your JFP article last year!

We were not even so much as introduced to CAPE ratios nor did we receive any training in the components of stock market returns (yield + earnings growth rate + changes to P/E multiple). The investment course was all about MPT. The course work definitely needs to change so it includes these topics and builds savvy in forecasting future market returns.

Dick Purcell, through his posts at, introduced me to the idea of risk being the risk of not reaching your goals. The CFP course work also didn't introduce us to the idea that the longer the investment horizon the higher your risk is of not reaching your wealth accum goals - also tripped upon this at Dick's website. Again, the CFP course work needs to change to include more about retirement planning - about sequence risk, safe withdrawal rates etc.

Adding this subject matter will increase the amount of time the average CFP aspirant takes to finish the course work...but will ensure that person is much more expert out of the chute!


Don't worry anonymous commenters, she did approve for me to provide her fully identifying information. I don't have any way of knowing who you are if you wish to post anonymously.

Thank you, this comment is very helpful for me to understand more about the CFP designation and how it may be improved, or also how alternatively the RMA designation could serve a role to fill in some of the missing pieces.

It does seem that the CFP education materials are missing some key details. There is so much more to retirement planning than just knowing about the tax-code savings vehicles. Retirement planning is about building investment strategies that will best help you to reach your retirement goals. Retirement advisors should understand the concept of goals-based investing, which is described very well in this article by Dan Nevins, and which I also described in my review of Risk Less and Prosper at Advisor Perspectives. That review starts with:

Little of what is taught in traditional investment textbooks is of value in personal financial planning. Risk is not standard deviation; it is the probability and consequences of not meeting one’s goals.  That real-world perspective animates a new book by Zvi Bodie and Rachelle Taqqu that implores advisors and their clients to lock in the funding of their essential expenses before worrying about their discretionary goals.

And though I thought that all CFPs would know the Trinity study, that may not really be the case, and even more, the education program does not give background for understanding my primary concern about the success rate tables found in the study.  This is how I summarized the argument in "Can We Predict the Sustainable Withdrawal Rate for New Retirees?" :

Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study. Studies such as those are fine for what they accomplish: they show how successful different withdrawal rate strategies were in the historical data. But it must be clear that this is not the information that current and prospective retirees need for making their withdrawal rate decisions. John Bogle makes clear why in his 2009 book, Enough. Though he was speaking about stock returns, the same idea applies to sustainable withdrawal rates, since they are related to the returns of the underlying portfolio of stocks and bonds. He wrote, “My concern is that too many of us make the implicit assumption that stock market history repeats itself when we know, deep down, that the only valid prism through which to view the market’s future is the one that takes into account not history, but the sources of stock returns” (page 102, original emphasis).

Future stock returns (and, therefore, future sustainable withdrawal rates) depend on the sources of returns: dividend income, growth of the underlying earnings, and changes in the valuation multiples placed on those earnings. The historical average success rate for a withdrawal strategy is not the information retirees need to know when determining their forward-looking sustainable withdrawal rate. As Mr. Bogle also writes, “But no, the contribution of dividend yields to returns depends, not on historic norms, but on the dividend yield that actually exists at the time of the projection of future returns. With the dividend yield at 2.3 percent in July 2008, of what use are historical statistics that reflect a dividend yield that averaged 5 percent - more than twice the present yield? (Answer: None.)”

Thank you again Kay. I hope something can be done to improve the curriculum for CFPs, and it would be great if the RMA program could play a role in this process as well.  If something needs to be cut from the CFP curriculum to make room for the new material, I suggest that planners can probably help their clients very well even if they have no idea what a Treynor ratio is (that is in the curriculum, right?)

To annuitize or not to annuitize

Just a short message here...

Joseph Tomlinson is on a roll. His new article at Advisor Perspectives called "New Tools to Manage Longevity Risk" provides an exploration of deferred income annuities (which means, pay now but defer the date that benefits arrive). It's an interesting article related to what I recently discussed in "Safe Retirement income with TIPS and a deferred annuity." I also appreciate more and more how his Monte Carlo simulations start with inputs for the current bond yields (not historical averages) and the average guess of many "experts" about what the future equity premium will be.  This does result in lower success rates for the 4% rule than just basing the simulations on historical averages. Especially considering that I wrote "Can We Predict Sustainable Withdrawal Rates for New Retirees," I'm guilty of basing Monte Carlo simulations too frequently on historical averages as a convenient shortcut. Joe is doing it the right way.

Second, in the past year I've had an opportunity to develop some valued friendships with individuals I've connected with through research. Bob Seawright writes frequently about the value of single-premium immediate annuities for one's portfolio, and my research does tend to validate this. I'm still researching annuities myself, but I am coming to think that partially annuitizing one's nest egg may make sense for a lot of people. Another friendship I've developed is with Dan Moisand, who recently cited my research to help make a case against annuities in his article "An Unattractive Proposition" at Financial Advisor magazine. The research he cites is a blog post "Retirement Withdrawals and Leftover Wealth" in which I describe about an issue Bill Bengen mentioned in an interview with Forbes last May.