Kimble Johnson • Louisville, KY
LPL Financial

Rebuilding and protecting retirement assets takes center stage with Kimble Johnson. New strategies and investment vehicles are a must—and third-party active managers are the experts he calls.

Proactive Advisor Magazine: Kimble, can you tell me a bit about your background?

I have been a financial advisor now for just over 30 years.

I am the son of a doctor, who was the son of a doctor, who was also the son of a doctor. Early on, I became much more interested in finance than medicine, and all of my work experiences have involved financial planning and investments. I have styled my practice as, and consider myself to be, a “financial physician” and a surgeon, when necessary.

My overriding concern is that my clients have their retirement expenses covered by “guaranteed” income sources, such as from Social Security, pensions, and/or annuities. I will usually recommend that the remainder of my clients’ assets be deployed for growth to offset inflation as much as possible.

What are the issues you see with retirement planning for your clients?

The retiree of today is handed a great deal of retirement risk as well as the prospect of navigating a “brave new world” of investing post-2008. The change in our lifetime from defined-benefit to defined-contribution retirement plans is a prime contributor. The old assumptions and the old tools will no longer work, and I personally think anyone trying to go it alone is facing a tough road.

The rebuilding and protection of retirement assets is the most critical task. It requires new strategies and investment vehicles that can transfer or reduce some of the risks.

What are those risks?

There are really three that I speak about with clients and prospects all of the time.

First, there is longevity risk. This is not exactly rocket science or unknown to people, but the implications are seldom well-planned for. Through medical advances and healthier lifestyles, life expectancies keep increasing. Great news for people in general, not so great if not factored into their financial plans.

Second, there is market risk. I talk about this in a couple different ways. There is the so-called sequence-of-returns risk, which is the unlucky event of suffering poor market returns early in retirement. Then there is “portfolio risk,” which is taking on too much risk and sacrificing safety for higher potential income or, alternatively, taking on too little risk and sacrificing potential portfolio growth.

Third, and closely related to the first two, is inflation risk: the potential of inflation to erode their purchasing power. This, again, is a concept most people understand on a surface level. What they generally do not understand is that every retirement portfolio should account for this with a growth component to their planning.

What is the solution to these risks?

I tell clients that in retirement there are no dress rehearsals. All of these risks have to be considered and planned for.

However, over the course of my career, I have been involved with just about every aspect of the investment and financial-planning business. I have come to believe that traditional buy-and-hold approaches to asset allocation and investment management are flawed. They are the antithesis to active investment management, where the monitoring of current market conditions is strongly factored into strategies.

I am a believer in identifying and managing for risk. That is what active management is all about, so it fits nicely with my world view, as well as my investment philosophy.

How do you employ active management on behalf of clients?

First of all, there is not just a one-size-fits-all solution. And there might be as many unique slants to active management as there are active managers. Going back to my medical analogy, I feel that I need to have access to all of the financial solutions out there, just as a doctor needs to have access to the latest medical theories and technologies. And like a doctor might call on specialists, I can use active managers who are experts at what they do: monitoring markets, strategies and performance every day.

I am also a strong advocate of variable annuities and have found opportunities to utilize active management within annuities. These can be fairly complicated products to the lay person, but I take great pains to explain them as simply as possible.

By utilizing active management within an annuity, I believe I can deliver several different benefits to clients in one product: some guarantees on income floors; the opportunity for asset growth; and, perhaps most importantly, strong risk management. I tell clients to think about their financial assets the way they do their home. You’ve insured your $400,000 home, so why wouldn’t you use some insurance, so to speak, on your $400,000 investment portfolio?

I have had more than one client tell me “it sounds too good to be true.” And I tell them, “It’s not too good to be true, but it is too good to be free.” Yes, there are management fees associated with this type of approach, but in general I think they are very reasonable and that the benefits far outweigh the costs over the long run.

You have spoken a lot about risk. Can these actively managed annuity approaches accommodate clients with various risk profiles?

Oh, yes, absolutely. While there are some restrictions placed by insurance companies as to percentages of allocation and number of trades and other things, within that there is quite a bit of flexibility. They can be appropriate for conservative clients and for those interested in a more aggressive growth stance.

I have one relatively affluent client with several million dollars in annuities. He is getting up there in years and has multiple objectives: maintaining a decent current income, estate planning for his family, and making sure his assets grow for contributions to charities after he is gone. It’s a pretty complex situation, but I have been able to meet all of those objectives with these type of annuity programs.

Thank you for the great insights, Kimble. Anything you would like to add?

Going back to my main theme of risk management, one principle I emphasize with clients is understanding the difference between their risk tolerance and their risk capacity. People may feel comfortable with the results of a typical risk questionnaire that shows them to have a certain appetite for risk. That might be called their “risk tolerance” in an academic sense.

But I really like to drill down and work through the numbers with them. When the rubber hits the road, could they really stand, economically, to lose a large percentage of their investment portfolio? The answer usually is no, which is why I like the double-edged sword of risk mitigation through both annuities and active investment management within that.