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Asset Distribution: The Next Big Wave

The buzzwords over the past 10 years have been asset accumulation and asset allocation. I propose that if you jump on this bandwagon now, you may be following the wrong paradigm.

Don’t get me wrong, asset accumulation and allocation are still very important. But the next big wave in our industry will be asset distribution.

With 76 million baby boomers approaching retirement, how prepared are you to provide them with a safe, dependable, consistent stream of income?

The skills we acquired in order to have been successful in the past will continue to serve us well into the future — if and only if we use those tools properly.  If the wrong tool is used in a particular situation, the results could be disastrous!

Let’s look at an example:

Dollar Cost Averaging — This is the process by which a client makes recurring deposits (usually monthly) into an investment account.  This could be a mutual fund, 401(k) or the like.  By investing the same dollar amount every month, the client will buy more or less shares based on the fluctuating share price every month.

As the share price rises, they buy fewer of the “expensive” shares.  As the share price drops, they buy more of the “cheap” shares.  This process allows the client to accumulate shares consistently at the lowest average cost.  Planners and “asset accumulators” have always praised the benefits of dollar cost averaging.

Dollar Cost Averaging in Reverse?

Now, let’s explore the benefits of dollar cost averaging within the new paradigm.  For those clients still in an accumulation mode, the tool still works well.  However, if the client is entering a distribution phase, dollar cost averaging in reverse could be a very damaging tool.  That which worked so well to accumulate funds could serve to derail a sound retirement plan.

If a client or advisor chooses to use reverse dollar cost averaging as a method to distribute retirement assets, they are using a great tool for the wrong job!  If the client redeems a fixed dollar amount every month, dollar cost averaging actually works against them.  As share prices rise, they would redeem fewer of the “valuable” shares.  If the share prices declined, they’d have to redeem more of the “depressed” shares to receive the same monthly income.  This is exactly the opposite of what they should be doing.  However, this is a very common practice based on old paradigm beliefs.

Why You Should Care About Long-Term Care

Let’s look at another example: Long-Term Care — Our job as advisors is not only to help our clients identify and take advantage of opportunities, but also to identify and avoid risks.

With the probability of a serious auto accident at 1 in 240, most people wouldn’t dream of driving a car without auto insurance.  Yet, for someone over age 65, the probability of some type of long-term care event is 1 in 2!

In the new paradigm, every client over age 50 should consider purchasing long-term care coverage. Today’s marketplace includes a variety of hybrid options in addition to traditional long-term care insurance: linked benefit plans, life hybrids with long-term care or chronic illness riders, and annuities with long-term care hybrids. With plenty of options to choose from, there is likely a fit for just about every client. If the client chooses not to buy, you should have them sign a waiver of liability form and keep this in their file permanently.

I know this sounds extreme, but there is one other thing to consider as part of the new paradigm: The growing risk of lawsuits. You can be sued for what you did do, what you didn’t do, and what you should have done.

A lawsuit could eventually be brought by heirs who expected to receive a certain inheritance but didn’t because you neglected to have that long-term care conversation with your client.

So now is the time to start thinking about how to help your clients maximize their asset distributions — well before they ask you about it.



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