Andrew Kern, CFP, ChFC, CRPC • Harrisburg, PA
Integrated Financial Partners, Inc. • LPL Financial
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Proactive Advisor Magazine: Andrew, tell us about your first few years in the industry.

I was recruited into the business right out of college by American Express Financial Advisors, which became Ameriprise Financial. I was with the firm for eight years and look back on the experience with very positive feelings. They essentially taught me how to build a business.

The company was committed to a financial-planning-first model, an approach I still use when working with clients. Coming out of college, I knew relatively little about the markets, investment philosophy, and how to build a financial plan. Ameriprise offered what I think is one of the foremost training programs in the industry, a combination of classroom learning and hands-on training in the field.

After some success building my client base, I moved into management. It gave me the opportunity to hone my management skills and to supervise many more client cases than I could possibly see in just my own practice. That was a very meaningful experience in terms of delving deeply into different kinds of client financial-planning situations.

What was the opportunity you saw in joining Integrated Financial Partners (IFP)?

IFP presented a fairly comprehensive business model that affords its advisors a tremendous amount of freedom within their practices while offering innovative resources and support from management and various internal teams. IFP has a strong planning culture and several proprietary models that I think are among the best in the industry. As I began working with more baby boomer clients with significant retirement planning needs, I felt IFP offered the right product and service options, tools, resources, and environment for me to take my practice to the next level.

 

What does IFP’s process, and yours, look like in working with planning clients?

IFP has a pretty consistent planning model that has four major steps. Then, depending on client needs, we drill down deep into each area. Broadly speaking, our objective at IFP is to help clients formulate achievable, yet ambitious, financial goals. We put together a holistic strategy approach that will help clients address those objectives over the long term.

The four broad areas of our approach are:

1. Needs assessment: We audit a client or client couple’s current estate to determine the amount of income needed in the future and any potential factors that may impact the financial plan. This leads to setting clear financial goals.
2. Analysis and design: We identify any gaps in a client’s current planning, coordinate varied investments and income streams, and determine risk tolerance. With these factors established, we can offer alternative strategies and identify financial-planning solutions.
3. Implementation: After personalized recommendations are mutually agreed upon, we can monitor the execution of the plan and help ensure that a long-term focus is maintained.
4. Service and support: Once the first three phases are completed, one of the most important aspects comes into play. We want to conduct a schedule of periodic review sessions to make sure that clients are well-informed on outcomes and their progress toward objectives, and to monitor any changes in their life situation or new financial developments. The financial plan has to be an adaptable road map, so revisiting the plan when life circumstances change is always an option.

How do you explain the process of retirement-income planning to clients?

At IFP, we talk a lot about the time distribution of money. An acronym we use for this is TNT: time, need, and tolerance. What that means, essentially, is looking out across a retiree’s future, taking into consideration detailed planning assumptions about how long they need to fund their retirement, what their income gaps look like, and what their tolerance for risk is.

We stress that it is all about creating an income strategy and that managing money in the distribution phase is inherently different from managing money in the accumulation phase. Asset-allocation strategies that may have worked fine in one’s accumulation years may no longer be appropriate for clients entering their distribution years. Buy-and-hold market-allocation models of diversification will not protect a retiree’s income plan in very poor market years. If there is a significant market event when a retiree is close to taking income or already in the distribution phase, they could face serious trouble over the long term.

We explain this sequence-of-returns issue. We might explain how differently a buy-and-hold asset-allocation plan could have performed for a retiree had they started taking distributions in 2008 versus 2015. Starting distributions in 2008 under a buy-and-hold view of asset management and distribution would have created major issues. Let’s say someone lost 40% of their portfolio from October 2007 to March 2009. Their million dollars is now worth $600,000. But their income needs did not stop. Let’s say they withdrew $150,000 over those three years. Their assets would now be down to $450,000. What do they do going forward? Their lifestyle dreams are in serious jeopardy.

What is your answer to that issue?

Clients cannot fully control when they retire, and they certainly cannot control how the markets are going to perform over the next several years following their start of distribution. Sequence-of-return risk is real and out of one’s control. What you can control is preparing for when you will need income and getting more active management around the piece of your portfolio that you will be touching five years or 10 years out.

We have developed an approach at IFP called the Lifetime Income Model. This helps us develop a strategic retirement distribution plan—one with a goal of helping retirement clients create an income stream and manage risk while providing tax efficiency and preservation of assets. It is designed to address current income needs while allowing other assets the opportunity to grow until they are needed. By allocating assets into a series of time-sensitive distribution phases, we can efficiently organize a client’s income needs throughout their lifetime.

Here is where we dig deeply into those TNT question areas: Which assets should be used first? Is there enough money saved? Are assets in suitable places to manage volatility within the portfolio and to reflect a client’s individual risk tolerance?

I find it worthwhile to simply map out with a client their big-picture financial goals over the duration of their potential retirement. We visually establish five-year time increments and the income gaps that exist during those periods. To greatly simplify, for the first five years, we want assets earmarked for distribution to be facing little market risk.

As we go out further on the timeline, we can recommend strategies that offer the potential for higher growth, along with somewhat higher risk. But we look to manage that risk by using time and actively managed strategies that are designed to offer some defensive measures if markets start to head south. These do not necessarily have to be pure equity strategies, and we have a wide range of options from our third-party managers, including absolute-return strategies and actively managed bond strategies.

“Managing money in the distribution phase is inherently different from managing money in the accumulation phase.”

In bucket three, which is out over 10 years, we are looking for more opportunities for asset growth. Generally speaking, I use 100% actively managed strategies for this bucket. I believe in diversifying by strategies, so I might use three to five different strategies for a client. These could range from an equity sector rotation strategy in the U.S. to multi-asset-class strategies that can utilize different investment opportunities from around the world. These managed strategies seek to make money in both up or down markets, and I have various strategic options to work with.

What message do you want to communicate to clients about your practice?

At the end of the day, I want clients to know that our firm is dedicated to delivering solutions for their most important financial issues without being cost prohibitive. We have terrific resources throughout our organization, including teams in case design, research, technology, and product specialists. We also have access to the deep resources of our third-party money managers, who bring their own research capabilities, technologies, strategic models, and execution. I believe it is a formidable package of knowledge and expertise. It is my job to deeply understand a client’s needs and objectives and recommend strategies and resources that will address those goals—and then to continually monitor their progress. I believe this is a very comprehensive and effective approach that we can deliver for clients.