Why will reading this document help your business and your clients?
Created to help advisors and home office leaders achieve the highest level of success in providing retirement income solutions, the Retirement Management Analyst (RMASM) designation is a rigorous educational and ethics curriculum.
The RMA designation provides you with a better process to:
- Build retirement plans,
- Illustrate the plans to clients, and
- Position clients for successful outcomes.
RMA Certificate Holders in Good Standing believe that it is the case because the Curriculum helps them:
- Build practices with a full range of process and product options that can be matched to real-world clients, and
- Improve the planning process with Flooring Allocations that can be understood by clients who are familiar with traditional asset allocation.
Head-Office Leaders believe that it is the case because the Curriculum is:
- Household Client Centric
- Product Agnostic, and
- Process Driven.
Compliance Officers believe that it is the case because the Curriculum seeks to improve best practices in the professional education industry:
- The providers of the RMA education program are accredited Universities (Boston University, Texas Tech University, Salem State University) that are completely separate from the developers of the RMA Curriculum and Examination (RIIA).
- RIIA does not receive a share of the Universities’ tuition and fees in order to maintain a true separation between the education providers and the content/exam developers.
What makes the RMA different from traditional models?
Moving directly to retirement “product allocations”—as it is sometimes called in the industry—without using the Flooring Allocations process is similar to the pre-asset allocation days in the investment management world when clients bought hot stocks from brokers. One of the fundamental ideas behind the RMA curriculum is that we cannot forecast the future accurately enough to create fully optimized plans over the retiree’s entire lifecycle.
These plans would be fragile to forecasting/model errors and the passage of time. Instead of trying to achieve more precise forecasts, it may be more accurate to use portfolio development processes—flooring allocations— that are resilient, even adaptive, to unplanned shocks and forecasting/model errors given the specific risk exposures faced by each client.
How are Flooring Allocations similar and yet different from traditional asset allocations?
This document summarizes the topic of Flooring Allocations (risk management techniques allocations) as a major differentiator and source of value for RMA Certificate Holders. Because the retiring client household has both systematic and unsystematic risk exposures by using the portfolio development concepts of “Upside, Floor, Longevity, Reserve” to present the fundamental retirement allocations, RIIA
has defined the equivalent of traditional “asset allocation” (Stocks, Bonds, Cash) for retirement management.
These fundamental retirement allocations are “risk management techniques” allocations and part of RIIA’s curriculum that concludes with “accounts and products selections” as shown in the chart below.
RIIA’s flooring allocations provide practical differentiation for advisors because it does so in a way that translates easily from what they already do for clients. To further contrast the two types of allocations:
- Traditional Asset Allocation is a fundamental differentiator of valid Investment Management processes.
The average asset allocation, before advisors adjust for systematic risk profile and unique client
circumstances, uses the following assets—Stocks, Bonds, Cash—and in the following average proportions—60%/30%/10%.
- “Risk Management Techniques Allocations,” that we shorten as “Flooring Allocations,” are the starting point for improving the existing Retirement Management processes. The average flooring allocations, before advisors adjust for the client’s mix of systematic risk profile, unsystematic risk exposures, household balance sheet structure, and other unique circumstances, use the following risk management techniques:
– (Retention) Upside portfolio,
– (Management) Flooring portfolio,
– (Pooling) Longevity portfolio,
– (Risk-Free) Reserves Portfolio.
For instance, the traditional 60%/30%/10% risky assets allocation for the average investment management client has an equivalent in terms of Flooring Allocations. Given specific process and product choices, the traditional investment allocation among risky assets can
become Asset/Liability-Matched to the household’s retirement income needs, and an equivalent in terms of Flooring Allocations would be 60%/30%/0%/10% .
As you can see from these examples, Flooring Allocations are a generalizable method to quantitatively describe existing process and product solutions as a mix of risk management techniques that address the client’s unique exposures to both systematic and unsystematic risks. Note: The development of quantified, benchmark Flooring Allocations for each Client Segment in RIIA’s Household Client Segmentation Matrix is an on-going research program known as RIIA’s Empirical Validation Framework (EVF).
As shown in the chart above, after setting the flooring allocations, the next step is the choice of matching “Process Approaches”:
- The Upside Portfolio, the risk retention allocation, can be implemented with traditional investment asset allocation processes.
- The Flooring Portfolio, the risk management allocation, can be implemented with a range of process
- approaches including Systematic Withdrawal Plan (SWPs), Time Segmentation, Ladders, etc.
- The Longevity Portfolio, the risk pooling allocation, can be implemented with a range of insurance solutions.
- The Reserves Portfolio, the risk avoidance allocation, can be implemented with solutions that provide access to liquidity.
The Flooring Allocations, Process, Account and Product Decision Tree Finally, the advisor can translate the flooring allocations and matching process approaches into specific accounts and products selections.
Moving directly to retirement “product allocations”—as it is called by some in the industry—without using the flooring allocations planning process is similar to the preasset allocation days in the investment management world when clients bought hot stocks from brokers. The full mapping of the product selections, their capital markets and returns expectations onto the Flooring Allocations is
an on-going effort because of the introduction of both new products and new features to existing products.
One of the fundamental ideas behind the RMA curriculum is that we cannot forecast the future accurately enough to create fully optimized plans over the retiree’s entire lifecycle.
These plans would be fragile to forecasting/model errors and the passage of time. Instead of trying to achieve more precise forecasts, it may be more accurate to use portfolio development processes—flooring allocations— that are resilient, even adaptive, to un-planned shocks and forecasting/model errors given the specific risk exposures faced by each client.