Helping clients pursue life’s great goals

John O’Brien • Brookfield, CT
Advanced Financial Advisors • Lincoln Financial Advisors
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Proactive Advisor Magazine: John, talk about your route into the financial-services industry.

I had a pretty interesting career before I became a financial advisor. Even though my experience was in very different industries, many of those experiences and the skill sets I acquired have influenced how I choose to run my practice.

I started out working for the parent company of Radio Shack and helped that organization expand into several European markets. I later worked in a number of capacities in the retail automobile industry, including fleet and equipment leasing and different roles with multiline operators with multiple locations. I think both of those career experiences provided some valuable insights into managing a business and understanding customer expectations and needs. It also gave me a firsthand look at the business cycle.

Toward the end of this period, I had a meeting with a customer that eventually led to me being recruited into the financial field. My first mentors were excellent at prospecting, marketing, and building a client roster. Although they had a consultative process with clients, I felt that their process was primarily transactional. I became committed to making my practice client-centric, more holistic, and planning focused. I started my brand and my firm in 1992 and have had a great relationship with Integrated Financial Partners (IFP), who brought us to Lincoln Financial Advisors (LFA), our supervising broker-dealer, in 2003.

How do clients benefit from your planning process?

First, I believe every client would benefit from a written comprehensive financial plan, for which we charge a competitive fee, and a formal complimentary estate plan.

When implementing the recommendations dictated by the plan, we prefer the fee-based advisory model, based on assets under management. This helps align our firm’s compensation with the goals and outcome our clients experience. If they prosper, we prosper. If they suffer, we suffer. Everything we do is a function of proper planning in the context of a client’s specific needs, circumstances, and temperament. I also was an early adopter of the use of third-party asset management and, as a part of that, active investment management. This provides clients with a value-added approach that is geared toward managing risk first.

In terms of the overall planning model, I am associated with both IFP and LFA. Both have invested a tremendous amount of time, effort, and capital to refine an evolved planning process that is needs-based and provides risk-managed solutions for clients. In light of the current demographic reality that over 10,000 baby boomers turn age 65 every day, and for many other reasons, we have developed a proprietary planning strategy for these folks.

“While there are no guarantees, one of the benefits of managing risk so diligently is that many clients will find their plan is performing above our conservative estimates.”

This planning methodology is called the “Lifetime Income Model,” and, in my opinion, it is elegant in its simplicity. The shorthand description is that it is a buckets-based retirement-income management strategy. It is organized around time frames in retirement, the different levels of risk required for those time frames, and the different investment approaches required for each bucket. It is all about finding solutions to help clients protect their purchasing power, indexed to inflation, to meet their retirement-income and legacy objectives.

Our process begins with active listening and digging deeply through the discovery process with clients. We discover the client’s recurring revenue sources, earnings if currently working, social security, pension, rents, royalties, and so on. These are their capital sums for eventual retirement. We determine a client’s spending requirements, which will enable us to determine what we call their necessary and excess estate.

If in retirement the capital sums aren’t sufficient to cover spending needs, we then fill the gap from accumulated savings and investments. A client’s gap needs will determine the amount of assets allotted to each bucket, and the allocation mix, for the time horizon.

In my practice, it’s always been the rule that investments are the tools that get our clients to their goals. Financial planning is the guide, and investment selections are strictly a function of the financial plan. That financial plan must reflect the client’s life experience, risk tolerance, time horizon, and personal nature.

I drill down on their background and their experiences with money and investments. I want to know what they feel they need to accomplish for basic financial security and what their dreams are beyond that. Over the course of several meetings, we will get all of the facts and figures out on the table, but we will also deal with the more qualitative side. What defines you as an individual, as a couple, and as a family? So, it is important to have a complete perspective when working with a client or client couple, which includes a firm quantitative grasp on their total financial picture and a more qualitative perspective and understanding of their outlook on life and their future.

What are some of the investment vehicles you might use for different buckets?

Let me qualify this as hypothetical—an investment plan has to be tailored to the individual. But, that said, here are some broad types of things we might do in the Lifetime Income Model.

We segment retiring clients’ likely retirement period and survivorship, typically into five-year buckets, or tranches. The first tranche is meant to cover any gap income needs above those provided by their capital sum for years one through five in retirement. We figure out the net present value of those five years of spending requirements and segregate the assets needed for that, allocating it to cash and cash equivalents. These will be low-yielding instruments, but also very low risk. The client will know they have a monthly paycheck for five years that they can count on.

The second bucket will have five years to work and earn an expected return that is meant to cover gap income needs for years five through 10. These assets will generally be allocated to fixed-rate-of-return instruments, such as a fixed annuity—which could be deferred—or laddered bonds, or managed bond funds. The current interest-rate environment has been challenging, so we may also look at things like conservative real estate investment trusts with appropriate holding periods. This allows for a very high probability that the second five years of retirement will also deliver the income needed for spending requirements without exposing the required capital to equity markets.

For the third bucket, which has 10 years to work, we can start adding somewhat riskier asset classes to the equation. In many cases, these are actively managed equity or bond strategies. There is a high level of risk management, even though history tells us that there are few 10-year periods in the equity markets where total returns are negative. The way we employ risk management, and utilize our institutional and third-party investment managers, we frankly would not expect any 10-year period to produce a negative return for a client. In the 10-year bucket and those that are further out, we can introduce virtually every major asset class and most geographic regions. These tranches buckets tend to be a blend of growth and value investment styles and active and passive investment disciplines. These can include tactically managed strategies, both constrained and unconstrained. The weightings are determined by the time horizon available for each tranche bucket as you go further out in time.

How do clients feel about this approach?

Our clients are very pleased with the process and the outcome. They appreciate the disciplined way we walk them through the steps, including a careful risk assessment specific to their circumstances and personality. Our approach to asset allocation, combined with the risk tools that our third-party asset-management programs can deliver, provides a sense of security that their retirement planning is on the right track. While finding a sustainable distribution withdrawal percentage and the sequence of returns are usually major challenges and risks for retirees, we believe we have effectively taken those issues off the table with our approach.

While there are no absolute guarantees in life or investing, we think our clients are well positioned for success. One of the important benefits of managing risk so diligently is that many clients will find their plan is performing above our conservative estimates. We believe the plan has to be a living and breathing process, and in those happy circumstances, we can sometimes present clients with some elegant choices. Imagine being able to fund your grandchildren’s college education or being in a position to write a check that would make a significant difference in your community.

But whether it is this fortunate outcome, or some unforeseen financial setback, our planning will always be flexible and interactive. We are committed to helping people deal with both the challenges and opportunities that every family faces as they pursue what we call “life’s great goals.”