Description
Business models are foundational building blocks for an industry. Successful businessmodels are anchored in the bedrock of the clients’needs, wants and behaviors.
The Retirement Management Analyst (RMA) Designation
2013 Curriculum Book for RMA Candidates
RIIA® Program Curriculum | Fifth Edition | DRAFT2
© 2013 Retirement Income Industry Association
What is this Curriculum and Why Does it Matter to your Advisory Practice?
This curriculum matters because retirement management is not “same-old-same-old”
investment management, “better asset allocation”, “new labels on old wine” or “talk-
ing-the-talk but not walking-the-walk”. Retirement management is a set of fundamental
disruptions from our traditional understanding of investment management.
This book is not the book of a single voice announcing change, disruption and
innovation. It is a book of many voices that are not only announcing what is coming but
that are also living it, and earning a living from it, on a daily basis. This book expresses
a collective voice, the voice of RIIA members, RMJ authors, RMA students and
graduates, RMAcertificate holders in good standing and most importantly, the clients.
The Three Disruptions: Why Are We Here?
We are here because something important to our business has changed and we cannot
find an adequate understanding of this change in the traditional places because their role
is to lobby in favor of an established point of view anchored in the past. This
curriculum, updated annually, documents the fundamental disruptions that cause these
changes, documents the known adaptations to these changes and organizes validated
solutions in a practical framework based on the unique perspective of RIIA’s “ViewAcross
the Silos.”
The top three disruptions include:
I The First Disruption: Clients are the bedrock of an industry. The risk profiles of
investment clients are well documented. The risk profiles of retirement clients are
documented in this curriculum. They include the risk profiles of investment clients
but they also include new risks. In particular, the risk profiles of retirement clients
include a category of un-systematic, client-specific “chance” risks (e.g. longevity,
healthcare costs, household shocks) that cannot be diversified away in the
capital markets. The credit for this insightful reordering of our initial retirement risk
factors, in two categories (systematic and un-systematic), goes to Dr. Doug Short.
These additional risks mean that retirement management cannot be a “single
cylinder” risk-management engine based on “risk retention”/diversification/asset
allocation. This means that retirement management, as shown in this curriculum, must
become a 4- or even a 5-cylinder risk-management engine that includes risk
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“retention”, “pooling”, “management”, “avoidance” and, as added to the list most
recently, “barbelling”.
I The Second Disruption: Business models are foundational building blocks for an
industry. Successful business models are anchored in the bedrock of the clients’ needs,
wants and behaviors. The business model of retirement management is different from
the business model of investment management. The business model of investment
management is “gathering assets under management (AUMs).” The business
model of retirement management is “paying a monthly check.” This difference is
fundamental and ripples through the value-chain of the financial industry, causing
a cascade of other disruptions that makes it impossible to “do” retirement
management as a small adaptation to investment management. Retirement management
is not a 20% change to the business model of investment management, it is a 10x
change to the business model of investment management. Incremental thinking and
adaptations will not “move the needle” sufficiently.
I The Third Disruption: Traditional investment management is a special case of the
larger financial framework that has been developed and formalized since the 1950s.
The larger framework considers both wealth and consumption from wealth.
Traditional investment management focuses on growing wealth. Retirement
management as a “monthly check” re-introduces minimum consumption in the
financial equation and explores its consequences, starting with the impact that it has
on our primary advisory goal for the client. This means that retirement management
looks at both consumption and wealth and therefore that there are at least two
possible and fundamental views of the topic: one view starts from consumption, the
other viewstarts fromwealth. One viewseeks to set and protect a consumption level,
the other seeks to grow and put wealth to work.
As you will see later in this book, these two views represent active and debating
cultures within RIIA. Because the fundamental equation now includes both
consumption and wealth, the locus of attention for retirement management
(consumption and wealth) is similar and yet different from the locus of attention for
investment management (wealth). The goal of investment management is to expose the
client’s wealth to upside potential subject to a risk profile. The goal of retirement
management is “First build a (minimum consumption) floor, then expose (to wealth
growing) upside.”
This basic idea can also be expressed in many other ways. This optionality of
expressions reflects RIIA’s caution about universally prescriptive statements in this field.
Optional expressions of “First build a floor, then expose to upside” include:
I “Build a floor and expose to upside”
I “If able, build a floor then expose to upside”
I “First insure, then invest”
I “Insure and invest”
I “Cushions before optimization”
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The Place of Flooring in the Conceptual Hierarchy: Where Are We?
The idea of flooring started with the traditional approach to upside investing with
equities. It was conceived as a process to develop a gradual way to migrate an optimized
investment portfolio to a combined retirement consumption and an upside portfolio. RIIA
called this approach to flooring “investment-based flooring” because it provides
recommendations for allocations between upside, flooring, longevity and a reserves
portfolio based on the client’s age, life expectancy, risk profile and capital market
expectations. Given specific values for these parameters, investment-based flooring shows
that the smoothest transition from a traditional investment portfolio to a retirement
portfolio takes place when the calculated flooring allocation for securing retirement income
is closest to the fixed income allocation in the traditional, optimized investment
portfolio. This is why it can be summarized that investment-based flooring makes the
recommendation that the 30% in bonds become incrementally liability-matched. This
is true within a window framed by the specific data elements of the client. Outside that
window, the flooring allocation may be smaller or greater than the bond allocation. Clients
whose flooring allocation requirements are greater than the initial bond allocation become
increasingly “Constrained” and some may even be “Under-Funded” as you will see later
in the book when we discuss RIIA’s household client market segmentation.
The diverging opinions about the value of flooring in practice may derive from the range
of opinions – that cannot be proven a priori – about a practitioner’s (or a client’s) view
of the primacy of the probability of failure vs. the magnitude of failure. Some believe
that the probability of failure looms greater in people's minds than the
magnitude of failure. Others believe that consequences always trump the odds. There
is no way to tell, a-priori, who is right and who is wrong for a specific set of
circumstances whose resolution and outcomes are yet ahead of us.
Some observe that most – if not all – clients cannot tolerate full longevity flooring because
it is too expensive. This is particularly true if one were building such a floor from
financial capital only and in the current Zero Interest Rate Policy (ZIRP) environment.
The implication is that flooring should be ignored for pragmatic reasons and advisors
should keep their focus on upside investing with risk mitigation practices such as Harold
Evensky’s “rolling” or “floating” floor as summarized in Chapter 5 of this curriculum
(customized total return portfolios).
However, when social capital sources of income become unreliable and financial
capital sources of income become too expensive, the solution set can only turn to sources
that derive from human capital: Work longer, save more, delay retirement and, of course,
looking at the liabilities side of the balance sheet, lower lifestyle by cutting expenses
and liabilities.
All of these ideas are good and correct when applied to the right clients in the right
situations. This book is a map to their application across the full household client
segmentation matrix. These divergences are a feature and not a bug in this curriculum
because RIIA seeks to document as complete a range of solutions and adaptations as
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possible to the problems faced by our many and different clients.
RIIA’s consensus at the time of this writing is that, indeed, a “zero-risk” consumption
floor is impractical for many reasons. However, all of us, rich or not, will have to find
a way to generate a minimum consumption floor in retirement. Some will only be able
to rely on their human and social capital. Others may also be able to rely on their
financial capital. Some floors from financial capital will be fragile to the variances of
the mix of risks that apply, so uniquely, to each one of us. In some cases, our efforts to
make specific parts of such floors less fragile to the variance of the matching risks may
be prohibitively expensive.
All recognize that naked exposure to retirement risks, including sequence of returns risk,
will have great negative impacts on some, but not necessarily all, retirees’ actual life
experience. Something needs to be done about it and the solution is not likely to be found
doing “same-old, same-old” investing.
Human capital adaptations – departures from past trends – to expensive consumption
flooring can already be seen in the employment data, suggesting that more people
are working longer than before and certainly longer than expected for many. Social
capital adaptations can be seen in the reported increase of multi-generational
households (grown children living with their parents or the elderly moving in with
their children) as well as in the Social Security, Medicare/Medicaid elections
advisory work performed by some RIIA members who use the Household Balance
Sheet Views
SM
as a map. As we look at the household balance sheet, we see that
clients can not only make adaptations to their three major sources of capital (human,
social and financial) but also to their liabilities. Finally, financial capital
adaptations may be seen with advisors who are moving from a primary focus on
upside portfolio optimization to developing individualized trade-off points that take
the following in consideration:
I The variance of total return solutions (sequence of returns problem)
I The variance of behavioral risks that cannot be diversified in the markets
I The expense of mitigating these variances for the consumption floor
Again, the consensus position is that there is no universally prescriptive solution about
floors, upside and risks. There are many combinations of client exposures to risks and
to their related moments. There are many available process and product solutions on the
table. There may be many more solutions yet to be discovered. Advisors need to
understand their client households, the range of risks/moments they face, the trade-offs
that can be achieved, the valid solutions that they can access and then match them all
with one another to the best of their abilities.
The distinctive value of using “First build a floor, then expose to upside” as an
easily memorized goal is not to imply zero-risk or risk-free exposures for retirees. Instead,
its value is to help us extend our view from a traditional “upside” focus on concave client
exposures (seeking an expected return with long exposures to risky assets whose
© 2013 Retirement Income Industry Association
un-systematic risk can be reduced by diversification in the capital markets) to this
upcoming and rapidly developing “flooring” focus on creating more convex client
exposures to the wider range of risks that affect retiring and retired households. The old
adage, “It is the variance that kills you” is doubly, or perhaps more accurately,
“compoundedly,” true for retirement portfolios.
This book, updated annually, is the record of RIIA’s collective efforts at understanding,
documenting and validating this newand rapidly growing world of retirement management.
As you will see, the curriculum seeks to create a space and a conceptual structure where
all voices that are valid and respectful of one another can be heard and presented in an
organized way. The pressure to improve the collective game increases daily. Every day
and for as many as 17 more years ahead, 10,000 Baby Boomer reach the traditional
retirement age of 65. The book is intended as a repository of RIIA’s collective
knowledge and insights to benefit retiring households, clients, advisors and the companies
that support them.
The History of RIIA’s Body of Knowledge and the RMA Designation: HowDid We Get There?
This book is built on a conceptual hierarchy – a structure that helps us organize our
thinking and find a recognizable and explainable place in it for new and valid ideas –
that is reflected in the organization of its chapters. Think of the conceptual hierarchy as
a Christmas tree on which we can attach ornaments in a practical and recognizable way.
You can read about the organization of the chapters in the next section, “The One-Minute
Summary of the Book.” Before you go there, and in order to help you place the
organization of the book in context, it is helpful to understand the developmental
history of the curriculum.
Curriculum development started before the 2006 foundation of RIIA. It was based on
work that Ben Williams and François Gadenne developed as co-founders of both Rational
Investors, Inc. (1996/1999) and Retirement Engineering, Inc. (started 2001). Dr. Zvi Bodie
was an influential advisor with both start-up companies.
As shown in the chart on the next page, the first step in curriculum development (2007)
was the development of the Retirement Management Professional (RMP) job
description with the help of several head-hunter members in general and George Wilbanks
(then at Russell Reynolds) in particular.
When Dr. Moshe Milevsky and Gil Weinreich (editor of Research Magazine) asked François
Gadenne to write a column from 2008 to 2010, at the same time that RIIA’s Education
Committee was formalizing the Retirement Management Professional job description and
the matching structure for the Retirement Management and Retirement Income Body of
Knowledge, each column became an opportunity to document and to test publicly some of
the key ideas.
When Nationwide (2008-2009) decided to embrace the Body of Knowledge for a
Customized Institutional Program (CIP), the columns became the seed that turned into
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Version 1.0 of this book.
When Dr. Michael
Zwecher and François
Gadenne collaborated in
2010 to launch the RMA
designation, both Version
2.0 of this RMAcurriculum
and Dr. Zwecher’s
“Retirement Portfolios”
book were written and
edited in parallel, sharing
material back and forth
including moving all the
“cases” into the book.
You will see that this 5th
edition brings cases back
into this book and presents
them in two forms: Short
Form Cases and Long Form Cases. Short Form Cases start with the consumption from
financial wealth idea, use a minimum number of variables and
progressively relax constraints and assumptions to include consumption from social
capital, the option of longevity insurance and specific assumptions about risk aversion.
Short Form Cases bridge to the Long Form Cases by way of a detailed Fact Finder and
Case Evaluation Template. Simplifying assumptions are now expanded with the messy
and complex reality of real life examples. Long Form Cases also use the
quantitative benchmarking data from the Household Balance Sheet Views
SM
research
project that was created in 2012 by RIIA’s Research Business Unit and under the
guidance of the RMI (RIIA’s Market Insight) Governance Board.
One of the lessons from comparing the Short Form Cases to the Long Form Cases is that
advisors do learn from the concepts in this book by finding ways to apply them, not only
quantitativelyandpreciselythroughsophisticated models, but alsoqualitativelyandaccurately
with respect to specific situations. Equations must be precise but life rewards accuracy.
Back in 2010, the implementation of “First build a floor, then expose to upside” was
primarily focused on the idea of "investment-based flooring," a gradual approach that
builds upon our traditional understanding of investment management. Investment-based
flooring starts with the traditional 60/30/10 portfolio. RIIA’s attention was still focused
on the wealth side of the fundamental equation.
In 2011, because of the leadership and sponsorship of Allianz Global Investors and the
inspired involvement of Bruce Wolfe, then Managing Director, RIIA launched the
PRE FACE FI GURE A: RI I A 2007 – THE RE TI RE ME NT BODY OF KNOWL E DGE
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© 2013 Retirement Income Industry Association
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Retirement Management Journal (RMJ) under Robert Powell’s direction as editor and
publisher. The RMJ documents the leading-edge thinking in retirement income and
retirement management. It also grants a Practitioner Thought Leadership Award during
RIIA’s Spring Conference and an Academic Thought Leadership Award during RIIA’s
Fall Conference. Finally, the best papers often become required readings as appendices
in this curriculum book.
In 2011, the Depository Trust & Clearing Corporation (DTCC), under the leadership of
Adam Bryan, completed the development of a multi-year project that is at the core of
RIIA’s Market Insight (RMI) research program. This project tracks online and in
real-time “who sells what retirement product and to whom” using the CUSIPs in the DTCC
transaction settlement flow, starting with the insurance industry 5,000+ CUSIPs. Elvin
Turner, director of the RIIA’s research business unit, assembled a collective of the best
research companies around this capability, including PwC(Anand Rao, Louis Lombardi),
E&Y(Gerry Murtaugh, Chris Raham), SBI (Larry Cohen), Cannex (Lowell Aronoff and
Gary Baker), Greenwald and Associates (Matt Greenwald), Brightwork Partners (Ron
Bush), Sagence (Joy Masterson) and many others. Over time, key RMI deliverables find
their way into the RMAcurriculum. For instance, this 5th edition brings the application
of RIIA’s Household Balance Sheet Views
SM
and RIIA’s Household Balance Sheet
Benchmarks
SM
into the curriculum.
In the 4th edition (2012), with the decisive help of Dr. Michael Finke and Dr. Wade Pfau,
RIIA documented the integration of the "goals-based flooring" approach in the
curriculum as a distinct practice that becomes very helpful with clients that need to
allocate more than 30% of their portfolio towards flooring. The focus of RIIA’s
attention shifted to the consumption side of the fundamental equation. Preface Figure
B (next page), illustrates the links between the third disruption, investment portfolios,
goals-based flooring, investment-based flooring and the retirement portfolios.
One of the core problems of retirement management in the present era is that ZIRPmakes
flooring prohibitively expensive because interest rates/yields/discount rates are so low.
Goals-based flooring helps us find solutions, outside of the traditional 60/30/10
framework, when the client does not have enough savings and/or when the “ZIRP-ed”
markets cannot generate sufficient yield in order to maintain a 60% equities allocation.
Goals-based flooring helps us expand our focus from simplifying consumption as a
percent of financial wealth to expanding our understanding (and complexity) of it,
including:
I A view of wealth that includes other sources of capital (human, social, financial)
I Detailed household budgets/income statements
I Working with the household’s budget as well as its assets
I Bringing tax considerations into the planning process
I Including healthcare in the planning process
I Detailed household balance sheet
I Working with the liabilities side of the balance sheet
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Retirement-management adaptations to the problem of insufficient assets to provide
flooring (Underfunded households) include many creative product and process
innovations, including use of the “mortality credit,” inclusion of alternative investments
such as leveraged rental real-estate and “floating floors” (as developed by Harold Even-
sky and included in the curriculum). These adaptations help ensure that the flooring
allocation, away from equities, can be kept to a manageable level.
In September, 2012, Morningstar’s research on “Gamma” – a concept that builds on invest-
ment “Alpha” and “Beta” – developed by David Blanchett and Paul Kaplan, revealed
the existence of a potential and large number of basis-points “lift” that comes from good
process management, defined as a combination of five specific planning techniques. This
finding is a timely reinforcement of an observation anchored in the history of RIIA’s
membership.
From 2006 to 2009 the leading business silo of RIIA’s “View Across the Silos”
association was the mutual funds industry. Its members were looking for an investment
product solution to the retirement problem. RIIAdiscovered that better asset allocation among
risky assets was not sufficient as a retirement product holy grail. From 2009 to 2012, the
leading business silo became the life companies. Its members were looking for an
insurance product solution to the retirement problem. RIIAdiscovered that ZIRP and the
requirement for capital reserves may cause a problematic demand/supply maladjustment.
Since 2012, the leading business silos are the distributors, including RIAs, hybrids, B/Ds
and banks. They are looking for a process solution to the retirement problem.
PRE FACE FI GURE B: CL I E NT DATA AND CL I E NT SE GME NTATI ON
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© 2013 Retirement Income Industry Association
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As an example of this trend, Tom Marra (Symetra) and Rich Moran (Symetra
Investment Services) reached out in 2012 to announce that after an extensive analysis
of existing retirement organizations and designations they chose to “support and help
grow RIIA.” When pressed as to why, the answer was so good that RIIAnow uses it as
a standard summary of what the RMAstands for. Their answer was that the RMAwould
help them grow their business because it was:
I Household centric
I Product agnostic
I Process driven
In this 5th edition, written under the guidance of Dr. Peng Chen – Chair of the RMA
CurriculumAdvisory Board – our current thinking is that retirement planning may best
start with process solutions. Given such process solutions, as described in this
curriculum, current investment and insurance products can be used to great mutual
benefit between the industry, the advisors and the clients – especially when one considers
the entire household balance sheet and realizes it is a map to unexpected and powerful
product combinations.
As you will see in this edition, we currently organize retirement risks and risk-management
techniques as shown on Preface Figure C (below, right).
In addition, as shown on Preface Figure D (next page), we map the process approaches
and product solutions that we have validated using the framework of these risk-management
techniques (retention, management, pooling, avoidance and barbelling).
We also organize the
solutions and process
approaches that we have
validated in two categories
that reflect the source of
their creation – engineering
and economic:
I Engineering process
approaches (e.g.
Zwecher’s Flooring,
Evensky’s Floating
Floor/Cash Flow
Reserves, Income
Ladders, Systematic
Withdrawal Plans,
Time Segmentation,
etc.)
I Economic process
approaches (e.g.
Bodie’s TIPS/Calls
PRE FACE FI GURE C: RI S K PROF I L E AND RI S K MANAGE ME NT TE CHNI QUE S
AL LOCATI ON
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Portfolio, Kotlikoff’s Consumption Smoothing, etc.)
Finally, a third category, empirical flooring allocations, is potentially RIIA’s most
important contribution to our community as we may be able to create standards for risk-
management technique allocations for key household client market segments, similarly
to what happened many years ago in the investment industry with the creation of 60/30/10.
As shown on the chart at
left, empirically validated
“flooring allocations” are a
general method to describe
all solutions and process
approaches, as you’ll see in
Chapters 5 and 7 (sections
5.4.f and 7.1.c in
particular).
To paraphrase one of
the RMA graduat es,
somewhere on t he
continuum between better
risky-asset allocations and
life-cycle theories, one may
fi nd t he pract i cal ,
h o u s e h o l d - c e n t r i c
sol ut i ons. Today, as
evidenced with this 5th
edition, we continue to
explore “what are the key
decisions?” and “who owns them?” so that this curriculum thrives as a relevant,
innovative and growing body of knowledge that helps you improve your retirement
practice and the life-long outcomes of your household clients. In this spirit, the 5th
edition introduces a third fundamental planning strategy. In addition to investment-based
and goal-based planning, RIIAhas also added product-based planning strategies for those
clients and circumstances (e.g. Defined Contributions) where the advisors cannot see
the entire household balance sheet.
During RIIA’s 2013 Spring Conference where the draft version of this book was released
for review by the RMA certificate holders in good standing who took the event’s
continuous education class, Tim Murphy, president of Investors Capital, announced
during his presentation that he was enrolling 500 advisors on the RMA education
program and that he is taking a lead role on the RIIA Board to help other members do
the same thing.
In this spirit of continuous improvements and improved outcomes, one of the key
improvements in this 5th edition is the continuing formalization of our Retirement
PRE FACE FI GURE D: THE RE TI RE ME NT MANAGE ME NT POL I CY STATE ME NT AND
THE PROCE S S/PRODUCT TRE E
© 2013 Retirement Income Industry Association
Policy Statement. As you can see, below, with this Household Retirement Policy
Statement – and as seems to be true with so many aspects of retirement planning vs.
investment planning – it is similar to and yet different from a Client Investment Policy
Statement:
I Retirement policy statement
I Summary of client-provided data
• Current status of client household (Overfunded, Constrained,
Underfunded)
• Income statement and balance sheet summaries
• Mapping of systematic and un-systematic risk exposures, including unique
circumstances
I Summary of advisor-provided data
• Capital market expectations
• Household Balance Sheet Benchmarks
SM
and projections
I Key policy decisions
• Level of data gathering: Incremental or comprehensive
• Frequency of monitoring: Quarterly, annually, other
• Sensitivity of risk management thresholds: Low, high
• Type of financial capital strategy: Dissipative of capital or conservative
of capital
• Type of retirement planning strategy: Investment-based, goals-based,
product-based
• Style of flooring determination: Formula-based, simulation-based, conceptual-
based
• Length of flooring: Life-contingent, period-certain, floating
• Solidity of flooring: Guaranteed, uncertain
• Expense of flooring: High, low
• Flooring implementation: One portfolio, multiple portfolios
I Strategic choices of risk-management techniques allocations (flooring
allocations)
• Retention – Upside portfolio (%)
• Management – Flooring portfolio (%)
• Pooling – Longevity portfolio (%)
• Avoidance – Reserves portfolio (%)
I Tactical selection of implementation processes
• Engineering process approaches
– Customized total return portfolios
– Systematic withdrawal plans
– Time segmentation
– Floor/upside
– Ladders
– Cash reserves
• Economic process approaches
– Consumption smoothing
– Options
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– Risk transfer
– Barbelling
I Execution
• Account choices
• Product selection
• Planned implementation steps
• Planned implementation schedule
The retirement policy statement is a good example of the spirit of the RMA: RIIAseeks
to document all valid approaches, match them to the relevant client segments and over
time with the RIIAEmpirical Validation Framework (EVF) highlight the approaches that
work best given all existing constraints including client behaviors, market behaviors, costs
and regulations.
What is the Meaning of the RMA Designation?
RMAcandidates who…
I Study at one of the approved university programs
I Pass the RMAexamination
I Stay current on their CE requirements
…are expected to have reached a minimum threshold of competence to provide
comprehensive, household-focused retirement planning without supervision.
This is only a minimum threshold and the first step in a career-long search for
development and expertise that can only come from daily work with household clients.
Our clients are our ultimate teachers and graders.
RIIA’s individual and collective competence focuses on ethics; please take note of
Section 7.4 of this book, the RMA Code of Ethics and Professional Responsibility, as
well as the Manual for Compliance Officers. Trust is earned as a
combination of being free of conflicts, demonstrating competence and acting
transparently. What RIIAdoes reflects on you. What you do reflects on RIIA. RIIAworks
hard to earn, to preserve and to keep your trust. RIIAexpects you to work hard to earn,
to preserve and to keep your client’s trust.
Upon successful completion of the RMA program, graduates receive the following
benefits:
I Free subscription to the Retirement Management Journal (PDF version) to keep
current on RMAcontinuing education requirements
I Deeply discounted registration to RIIAconferences
I Discounted full individual membership in RIIA (Note: RIIA membership is not
necessary to be an RMAcertificate holder in good standing)
I Eligibility to join the Practitioners Peer Review Committee for the Retirement
Management Journal
PREFACE
© 2013 Retirement Income Industry Association
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Prerequisites or Experience Required to Obtain the RMA
In general, RMA candidates already have demonstrated knowledge and experience in
the practical application of basic retirement planning and investment principles.
Typically, we look for at least three (3) or more years of experience as a financial
advisor working with clients broadly on retirement and non-retirement portfolios, or
comparable experience in the financial services industry directly involved in the
retirement and investments business. Holding various FINRA registrations, e.g. series
7, 24, 63, 65, or 66, as well as other designations, e.g. CFA, CFP
®
, etc. will all be
considered as evidence of prerequisite knowledge.
Candidates for the RMAdesignation must:
I Read the following books, and become familiar with the level of detail, that is
summarized in the RMAcurriculum book:
I The current edition of the the RMAcurriculum book
I Retirement Portfolios: Theory, Construction and Management, by Dr. Michael
Zwecher
I Retirement Portfolios: Workbook, by Dr. Michael Zwecher
I Retirement Income Redesigned: Master Plans for Distribution – An Adviser's
Guide for Funding Boomers' Best Years, edited by Harold Evensky and Deena
B. Katz
I Risk Less and Prosper: Your Guide to Safer Investing, by Dr. Zvi Bodie and
Rachelle Taqqu
I Control Your Retirement Destiny: Achieving Financial Security Before the Big
Transition, by Dana Anspach
I Antifragile: Things That Gain from Disorder, by Nassim Nicholas Taleb
I Pass a RIIA-approved education program such as:
I The Retirement Management Program at Boston University's Center for
Professional Education
I Salem State University's 5-day in-class intensive seminar
I The Intensive Retirement Management Seminar at Texas Tech University
I Complete the RMA application and certify that the information in the application
is accurate. Further, candidates must certify that they have not been fined nor
sanctioned from practicing in the financial services field by any state or federal
government, regulatory authority, by any industry self-regulatory body or by any
employer
I Pay the initial RMA certification fee of $395, which includes the annual
certification fee, plus the one-time examination fee. Subsequent annual certification
fees are just $295, which includes an eSubscription to the Retirement Management
Journal (RMJ)
I Sit for and pass the RMAexamination
Three Universities Now Support Preparation for the RMA Designation
I The Retirement Management Program at Boston University's Center for
Professional Education (BUCPE). The BUCPE program is a 5-week, interactive
web-based curriculum offering the flexibility to take the class when and where you
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THE CONTENT OF THIS BOOK DOES NOT PROVIDE INVESTMENT, FINANCIAL OR TAX ADVICE AND SHOULD
NOT BE USED TOMAKE ANY INVESTMENT DECISIONS. THE AUTHORS DONOT ADVOCATE THE PURCHASE
OR SALE OF ANYSECURITYOR INVESTMENT, NOR DOTHEYENDORSE OR SPONSOR ANYPRODUCTS, GOODS
OR SERVICES THAT MAY BE REFERRED TOHEREIN. THE READER SHOULD ALWAYS SEEK THE ASSISTANCE OF
A PROFESSIONAL FAMILIAR WITHHIS OR HER OWNPERSONAL CIRCUMSTANCES FOR TAX, FINANCIAL AND
INVESTMENT ADVICE.
want within the semester dates. The cost is $1,295. Contact BUCPE directly for
scheduling and more information or call 1-800-329-4996.
I Texas Tech University (TTU) offers a 5-day, in-class customized seminar taught
by its Ph.D. faculty that includes lectures and lab assignments. The class is offered
in Lubbock, TX on the TTU campus and runs Monday morning through Friday with
the course exam on Saturday morning. The cost is $1,975 (includes hotel Sunday -
Friday nights). The seminar is scheduled to be offered twice a year (Spring and Fall).
For more information, contact Michael Finke, Associate Professor and Director of
the Personal Financial Planning Ph.D. program.
I Salem State University (SSU) in Salem, Massachusetts offers a 5-day in-class
intensive seminar during the summer. This SSU “boot camp” specializes in
training clients and advisors who want to become RMAinstructors. The cost is $1,575
and includes refreshments and lunch. On campus lodging is available for an
additional fee. Contact Andrea Swirka at Salem State University, Professional and
Community Enrichment Programs for more information.
All approved education programs must teach to the curriculum to keep their approval
which is granted annually. Each program achieves differentiation in the marketplace by
adding packaging options, reading materials, access to expert faculty members, access
to Teaching Software Platforms, etc., based on the unique strengths of their institutions,
staff and program design. As you will see in the material on RIIA’s Distribution
Channels Segmentation Matrix, RIIA seeks to match approved education programs to
channels so that everyone can find practical and proper access to this material.
Special Pricing and Customized Programs are Available for RIIA Member Firms
This is a powerful, cost-effective way for companies to provide state-of-the-art training
for advisors, wholesalers or other key employees.
RIIA member firms who are interested in training at least 50 employees can obtain
discounted pricing on both the required educational program and the RIIA1st year RMA
certification fee. Additionally, RIIAcan provide an additional day of exam preparation
and an on-site proctored examination for your RMAcandidates at no additional cost. Please
contact us at either [email protected] or [email protected] for more details and to design
a program that best works for you. I
TABLE OF CONTENTS
Table of Contents
© 2013 Retirement Income Industry Association
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Preface 3
What Is This Curriculum and Why Does it Matter to Your Advisory Practice? 3
The Three Disruptions: Why Are We Here? 3
The Place of Flooring in the Conceptual Hierarchy: Where Are We? 5
The History of RIIA’s Body of Knowledge and the RMADesignation:
How Did We Get There? 7
What is the Meaning of the RMADesignation? 13
Prerequisites or experience required to obtain the RMA 14
Three Universities Now Support Preparation for the RMADesignation 15
Special pricing and customized program are available for RIIAmember firms 15
The ‘One-Minute’ Summary of the Book 23
Who This Book Is For 23
Build a Floor and Create Upside Potential 23
The Hub and Spoke Model 24
The Hub at the Center of the Advisory Process – The Client 24
Spoke One: The Household Balance Sheet is the Start of a Life-cycle Plan 24
Spoke Two: Cash Flows and the Completion of the Life-cycle Plan 25
Spoke Three: Retirement Risk Mapping and Flooring Allocations 25
Spoke Four: Flooring Allocations and the Retirement Policy Statement 25
Spoke Five: Specific Products to Implement the Plan and Allocations 25
Putting It Together: Presenting and Monitoring the Plan 26
Chapter 1: The Hub at the Center of the Advisory Process – The Client 27
1.1.a The Hub of the Advisory Process – The Client 27
1.1.b Working with Seniors 31
1.1.c What is Your Learning Identity? What is Your Client’s
Learning Identity? 33
1.1.d Helping Clients Leave Their “Comfort Zones” 37
1.1.e Morningstar’s Gamma: The Value of Process 41
1.2 The Accumulation Perspective 47
1.3.a The Retirement Perspective 49
1.3.b Definitions of Key Terms, Assumptions and “RMA-isms” 55
1.4.a Three Kinds of Retirement Clients 67
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1.4.b Calibrating the AUMAxis 73
1.4.c Three Kinds of Retirement Clients – ABalance Sheet
Perspective (A/L Ratio) 77
1.5 Available Client Data Drives the Process 81
1.6 The Distribution of Wealth in America 87
1.7 Recapitulating Where We Are in the Process 95
1.8 Sources and Resources for Chapter 1: The Hub – The Client 97
Chapter 2: The First Spoke – The Household Balance Sheet is the Start of the
Life-cycle Plan 99
2.1 Spoke One: Life-cycle Plan, Part I – The Balance Sheet 99
2.2 Benefits of Focusing on the Household 103
2.3 Assets Minus Liabilities Equals Owner’s Equity 107
2.4.a AHousehold’s Three Sources of Capital 109
2.4.b Revisiting the Three Legged Stool of Retirement 111
2.4.c Advising a Client on Their Human Capital 115
2.5 Helping Clients Understand Household Finance 119
2.6 Types of Financial Capital 121
2.7 Data-Gathering Methodologies for Household Statements 123
2.8 Top-Down Estimates 127
2.9 Bottom-Up Estimates 129
2.10 Detailed Household Balance Sheets 131
2.11 The Life-cycle View of the Household Balance Sheet 135
2.12 Dynamic Stochastic Optimization or Present Values on the
Balance Sheet? 137
2.13 Pensions – Social Capital or Financial Capital? 141
2.14 Estate Planning 143
2.14 Recapitulating Where We Are in the Process 145
2.15 Sources and Resources for Chapter 2: Spoke One – The Balance Sheet 147
Chapter 3: The Second Spoke – Cash Flows and the Completion of the
Life-cycle Profile 149
3.1 Spoke Two: Life-cycle Plan, Part II – Cash Flows 149
3.2 What Portion of Annual Consumption Must Come
from Financial Capital? 153
3.3 The Basic Household Budget 157
3.4 Expenses – Fixed vs. Discretionary 161
3.5.a Detailed Household Income Statement/Budget 163
3.5.b Tax-Bracket Planning 167
3.5.c Tax Optimization 173
3.6.a Improving Mortality: HowLong Does the Plan for the Floor Need to Last 177
3.6.b The Life-cycle View of Distribution Curves and Life Events 181
3.6.c Retirement Aha Moments 183
3.6.d The New Retirement Era 193
3.6.e Boomer Statistics 197
© 2013 Retirement Income Industry Association
3.6.f Rising Healthcare Costs 199
3.6.g Out-of-Pocket Expenses 203
3.6.h Long-Term Care Planning 207
3.6.i Medicare 211
3.6.j The State(s) of Medicare 215
3.6.k Social Security 219
3.6.l Pensions 229
3.6.m The Future 231
3.7 Recapitulating Where We Are in the Process 233
3.8 Sources and Resources for Chapter 3: Spoke Two – Cash Flows 235
Chapter 4: The Third Spoke – Retirement Risk Mapping and Flooring Allocations 237
4.1 Spoke Three: Assessing Retirement Risks 237
4.2 Managing AWider Range of Risks to Establish the Floor 241
4.3 The Retirement Risk Profile 243
4.4 AStressful Transition Due to Changing Priorities 247
4.5 Taxes are a Major Retirement Risk 249
4.6 Credit Risk is a Major Retirement Risk 253
4.7 Health Care Cost Uncertainty is a Major Retirement Risk 255
4.8 RIIA’s Retirement-Income Risk Framework: Mapping Risk
Exposures 257
4.9 Risk Aversion Profiles Affect the Shape of the Distribution Curve
Over the Life Cycle 261
4.10.a Transitioning From the Risk Exposure Maps to Allocations Among
Risk-Management Techniques 265
4.10.b Black Swans and the 4-block Risk Management Approaches Matrix 269
4.11.a Determining the Flooring Allocation: The Formula View of Flooring 273
4.11.b Determining the Flooring Allocation: The Importance of Flooring
Later in Life 281
4.11.c The Empirical Flooring Allocations 285
4.12 Recapitulating Where We Are in the Process 289
4.13 Sources and Resources for Chapter 4: Spoke Three – Retirement
Risk Profile 291
Chapter 5: The Fourth Spoke – Flooring Allocations and the Retirement Policy
Statement 293
5.1 Spoke Four: Managing Retirement Risks 293
5.2 RIIA’s “First Build a Floor, then Expose to Upside” Goal
is Compatible with MPT 297
5.3.a Two Basic Approaches to Creating Optimal Floor and
Upside Portfolios 301
5.3.b The Conceptual Hierarchy: Why Flooring is a Higher Conceptual
Level than Asset Allocations, Annuities, SWPs, Time Segmentation,
Ladders, Reserves and Options 305
5.4.a The Engineering Process Approach 307
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5.4.b Deciding When to Focus on Flooring with Mike Zwecher’s
Engineering Process Approach 311
5.4.c Introducing the Evensky & Katz Cash Flow Reserve Strategy 317
5.4.d Time Segmentation 321
5.4.e Systematic Withdrawal Plan 327
5.4.f Managing the Retirement-Income Portfolio – The ViewAcross
Engineered Retirement-Income Strategies 329
5.8.g Engineering Income Floors and Mitigating Retirement Risks
With Dedicated Portfolios 343
5.5.a The Economic Process Approach 355
5.5.b Introducing Zvi Bodie’s and Rachelle Taqqu’s Risk Less and
Prosper: Your Guide to Safer Investing 357
5.5.c Modern Retirement Theory 361
5.5.d What Does Consumption Smoothing Add to Creating Optimal
Portfolios? 369
5.5.e What Does Behavioral Finance Add to Creating Optimal
Portfolios? 377
5.5.f What Do Monte Carlo Simulations Add to Creating Optimal
Portfolios and Why Is “60/30/10” too Risky for Retirement? 381
5.5.g Beware the Black Swans (and the Dragon-Kings!) 385
5.6 The Retirement Policy Statement 389
5.7 Recapitulating Where We Are in the Process 395
5.8 Sources and Resources for Chapter 5: Spoke Four – Risk
Management Allocations 397
Chapter 6: The Fifth Spoke – Account Location Choices and Product Selections 399
6.1 Spoke Five: Choosing The Right Accounts and Selecting the
Right Products 399
6.2.a APractitioner’s View: From Flooring Allocations to
Implementation Processes to Account Selection 401
6.2.b The Universe of Account and Regulatory Vehicles 403
6.2.c Account Vehicle Definitions 405
6.3.a RIIA’s RMACurriculum: From Flooring Allocation and
Implementation Processes to Retirement Product Selection 409
6.3.b Key Characteristics of Flooring Products 413
6.3.c Thematic View of Flooring and Upside Products 415
6.4.a The Universe of Flooring and Upside Products 417
6.4.b The Impact of the Three Disruptions at the Product Level 421
6.4.c Specific Products to Implement the Plan and Allocations 425
6.4.d Product Definitions 433
6.5 Recapitulating Where We Are in the Process 441
6.6 Sources and Resources for Chapter 6: Spoke Five – Products 443
TABLE OF CONTENTS
© 2013 Retirement Income Industry Association
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Chapter 7: Putting It Together: Presenting and Monitoring the Plan 445
7.1.a Bringing the Process to Closure 445
7.1.b RMPs are Professionals 449
7.1.c RIIA’s Body of Knowledge as a Derivitive of the RMP
Job Description 453
7.1.d The Differentiation Value of the Designation 457
7.2 Ethics 461
7.3.a What Is Trust? 463
7.3.b The Saliency of Trust in the Current Crisis 467
7.4 Retirement Management Analyst (RMA) Code of Ethics
and Professional Responsibility 469
7.5.a Introduction to the Accumulation and the Retirement
Income Toolboxes 483
7.5.b The Importance of Your Frame of Mind 487
7.6.a Integrating Education, Experience and Ethics with Examples 491
7.6.b How to Evaluate Long Form Cases Using the Curriculum Material 493
7.6.c ACase Study 507
7.7.a The Importance of Process Transparency 521
7.7.b Introduction to Product and Solution Management 525
7.7.c Practice management Guidelines for RMPs 529
7.7.d Typology of Financial Professionals 533
7.8 Sources and Resources for Chapter 7: Putting It Together 539
Glossary 541
Note: Prior editions included several pages of acknowledgments to RIIA’s Board
members, Special Advisors, Business Unit Directors, Committee Chairs and Members.
One of our graduates told us, “My inventory is my time”.
It is with this comment in mind that we moved these acknowledgements pages, as well
as the list of your fellow RMA Graduates in good standing, to the RIIA website under
the “Membership” tab so that we can present you with the most complete and up-to-date
lists at all times. I
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ONE- MI NUTE SUMMARY
The ‘One-Minute’ Summary of the Book
© 2013 Retirement Income Industry Association
23
Who This Book Is For
Financial professionals, including asset managers, licensed agents and representatives
of broker/dealers, registered investment advisors and certified financial advisors (both
in the retail and the employer-sponsored plan sectors) can expect this book to help them:
I Organize their thoughts about their clients’ financial situations
I Reach conclusions about their clients’ retirement-income needs
I Recommend appropriate retirement-income plans
I Explain why the plans make sense
I Implement the plans by changing the clients’ allocations to risk-management
techniques, thus enabling them to purchase a better mix of products
I Take the examination for RIIA’s RMAdesignation
This book also contains “RMA-isms” that will be defined as we progress through the
chapters, including:
I Overfunded, constrained and underfunded
I Goal-based planning, investment-based planning and product-based planning
practices
I Household Balance Sheet View
SM
and Household Balance Sheet Benchmarks
SM
I Human capital, social capital, financial capital, liabilities
I Consumption, fixed and discretionary expenses
I Risk exposure mapping of systematic and un-systematic risks
I Risk-management techniques (flooring allocations)
I Engineering and economic process approaches, including floor/upside, custom total
return portfolios, SWPs, ladders, time segmentation, etc.)
I Account location choices and product selections (product types include: assets/
products that wrap the market, “risk-free” assets, products that wrap the mortality
credit, reverse mortgages, leveraged rental real estate, options/derivatives, structured
products, etc.)
I Accumulation vs. distribution toolboxes
I Retirement Management Professional (RMP)
I Retirement Management Body of Knowledge
I Retirement Policy Statement
Build a Floor and Create Upside Potential
Most investment professionals specialize in managing client assets, with an eye toward
maximizing accumulation during the clients’ working lives. The duties of Retirement
Management Professionals, however, are broader. These advisors need to manage their
clients’ assets, liabilities and cash flows, with an eye toward minimizing a broad range
of risks during their clients’ retirements.
RIIAdeveloped a hub-and-spoke framework to organize retirement-income solutions.
The framework has seven chapters – a hub, five spokes and an integrative process. The
client is the hub, and the spokes are the steps in a process of integration and
monitoring. RIIA calls them “spokes” rather than “steps” for two reasons. First, they
represent a cyclical process of interaction with the client that has no specific beginning
or end. Secondly, each one strengthens the relationship between advisor and client.
The objective is to build a floor and create upside potential. RIIAassumes that, during
retirement, clients need a sufficient level of income (“a floor”) from guaranteed or
low-risk sources, as well as the potential for growth through exposure to risky assets (the
“upside”).
Building a portfolio for retirement income isn’t necessarily harder than building a
portfolio for asset accumulation, but it does require a deeper assessment of the client’s
needs. The investment of more time at the beginning of the relationship can pay off,
however, in the creation of satisfied clients whose assets will be “stickier” and who will
bring additional advisory opportunities.
The Hub and Spoke Model
The Hub at the Center of the
Advisory Process – The
Client
Intuitively enough, the
client stands at the center or
“hub” of the process.
However, the retirement
client segmentation is not
based on Assets Under
Management (AUMs) only
but on a ratio of the client’s
annual consumption in
retirement to their financial
capital.
The primary quantitative
objective of Chapter 1/The
Hub is to calculate a first-
SUMMARY FI GURE A: THE RI I A HUB AND SPOKE MODE L
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Balance
Sheet
Cash Flow
& Life-cycle
Profile
Retirement
Risk
Mapping
Risk
Management
Allocations
Accounts &
Products
Client
Relationship
ONE- MI NUTE SUMMARY
© 2013 Retirement Income Industry Association
25
order estimate of the client’s consumption from financial capital to financial capital ratio.
Inputs for this calculation include an estimate of the client’s current financial capital and
his or her expected annual consumption level in retirement. Outputs from this
calculation categorize the client as underfunded, constrained or overfunded. This first-
order estimate will be revised as we move through the spokes. This core level of analysis
focuses on averages and can also be refined with an advanced-level analysis including
a specific year-by-year simulation.
Spoke One: The Household Balance Sheet is the Start of the Life-cycle Plan
Focusing first on the household’s balance sheet, analyze the client’s income statement
(current income vs. current expenses), balance sheet (assets vs. liabilities) and cash flow
statement (a snapshot of cash inflows and outflows). This is the first step towards
creating a life-cycle plan. This can take place before, at or after retirement, but the
earlier, the better. It is important to remember the difference between cash flowand income,
our goal is to maximize positive cash flow.
The primary quantitative objective of Chapter 2/Spoke One is to calculate a first-
order estimate of the client’s household balance sheet. Inputs for this calculation
include asset balances (e.g., financial assets and bank balances) as well as
expected taxable and non-taxable cash flows. Inputs also include liabilities, such
as mortgage balances, expected annual consumption in retirement, desire for a
bequest, etc. Finally, inputs for this calculation include discount rates/expected returns.
Outputs from this calculation are shown as a household balance sheet with projected
and discounted values as of the client’s retirement date.
Spoke Two: Cash Flows and the Completion of the Life-cycle Profile
Match the client’s anticipated social capital (e.g., Social Security, pension income), human
capital (e.g., income from work in retirement) and financial capital (investments) with
his or her income statement, balance sheet and cash flows. The advisor determines the
portion of the client’s minimum income or “floor” that social and human capital can
provide, and how much will need to come from financial capital. This step completes
the creation of life-cycle plan projections.
The primary quantitative objective of Chapter 3/Spoke Two is to refine the cash flow
inputs that derive fromthe client’s household balance sheet. Inputs include personal income/
earnings as well as taxes, fixed expenses and discretionary expenses. Outputs are shown
on both the client’s household income statement and balance sheet.
Spoke Three: Retirement Risk Mapping and Flooring Allocations
Turn the life-cycle plan into a retirement-income plan that matches the income from the
client’s three sources of capital to the potential costs associated with the client’s
identifiable retirement-income risk factors (e.g., health risk, inflation risk, longevity risk,
etc.).
The primary quantitative objectives of Chapter 4/Spoke Three are to determine the client’s
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risk exposures (systematic and un-systematic) and to calculate the portion
(percent and dollar) of his or her financial portfolio that should be dedicated to
flooring. In addition to identifying risks and estimating risk aversion, inputs include the
client’s current age, desired retirement age, life expectancy and various inflation and
discount factors. Outputs are the client’s portion of his or her financial portfolio that should
be dedicated to flooring.
Spoke Four: Flooring Allocations and the Retirement Policy Statement
Using the client’s financial capital, create an income floor through the allocation of risk-
management techniques that are compatible with the client’s risk profile. Then, with any
remaining assets, create an upside. Flooring allocations will guide the choice of process
approaches leading to account location choices and product selections.
Chapter 5/Spoke Four customizes validated process approaches (engineering and
economic). The primary quantitative objectives of Chapter 5/Spoke Four are to
determine the portions of the upside, flooring, longevity and reserve portfolios and to
match themwith one or more process approaches. Inputs were developed in prior spokes.
Outputs are the percent and dollar portions of the flooring allocations and process approach
recommendations.
Spoke Five: Account Location Choices and Product Selections
Chapter 6/Spoke Five provides a high-level mapping of available accounts and
product types for each of the four risk-management techniques. This provides guidance
to the financial advisor who – within the constraints of his or her chosen process approaches
– can then exercise his or her best professional judgment to implement and
manage the flooring and upside portfolios.
Putting It Together: Presenting and Monitoring the Plan
The advisor integrates findings and recommendations into a plan that can be easily
presented to and understood by the client. This integration brings together the Code of
Conduct and the Retirement Policy Statement. I
doc_406065128.pdf
Business models are foundational building blocks for an industry. Successful businessmodels are anchored in the bedrock of the clients’needs, wants and behaviors.
The Retirement Management Analyst (RMA) Designation
2013 Curriculum Book for RMA Candidates
RIIA® Program Curriculum | Fifth Edition | DRAFT2
© 2013 Retirement Income Industry Association
What is this Curriculum and Why Does it Matter to your Advisory Practice?
This curriculum matters because retirement management is not “same-old-same-old”
investment management, “better asset allocation”, “new labels on old wine” or “talk-
ing-the-talk but not walking-the-walk”. Retirement management is a set of fundamental
disruptions from our traditional understanding of investment management.
This book is not the book of a single voice announcing change, disruption and
innovation. It is a book of many voices that are not only announcing what is coming but
that are also living it, and earning a living from it, on a daily basis. This book expresses
a collective voice, the voice of RIIA members, RMJ authors, RMA students and
graduates, RMAcertificate holders in good standing and most importantly, the clients.
The Three Disruptions: Why Are We Here?
We are here because something important to our business has changed and we cannot
find an adequate understanding of this change in the traditional places because their role
is to lobby in favor of an established point of view anchored in the past. This
curriculum, updated annually, documents the fundamental disruptions that cause these
changes, documents the known adaptations to these changes and organizes validated
solutions in a practical framework based on the unique perspective of RIIA’s “ViewAcross
the Silos.”
The top three disruptions include:
I The First Disruption: Clients are the bedrock of an industry. The risk profiles of
investment clients are well documented. The risk profiles of retirement clients are
documented in this curriculum. They include the risk profiles of investment clients
but they also include new risks. In particular, the risk profiles of retirement clients
include a category of un-systematic, client-specific “chance” risks (e.g. longevity,
healthcare costs, household shocks) that cannot be diversified away in the
capital markets. The credit for this insightful reordering of our initial retirement risk
factors, in two categories (systematic and un-systematic), goes to Dr. Doug Short.
These additional risks mean that retirement management cannot be a “single
cylinder” risk-management engine based on “risk retention”/diversification/asset
allocation. This means that retirement management, as shown in this curriculum, must
become a 4- or even a 5-cylinder risk-management engine that includes risk
3 PREFACE
Preface
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“retention”, “pooling”, “management”, “avoidance” and, as added to the list most
recently, “barbelling”.
I The Second Disruption: Business models are foundational building blocks for an
industry. Successful business models are anchored in the bedrock of the clients’ needs,
wants and behaviors. The business model of retirement management is different from
the business model of investment management. The business model of investment
management is “gathering assets under management (AUMs).” The business
model of retirement management is “paying a monthly check.” This difference is
fundamental and ripples through the value-chain of the financial industry, causing
a cascade of other disruptions that makes it impossible to “do” retirement
management as a small adaptation to investment management. Retirement management
is not a 20% change to the business model of investment management, it is a 10x
change to the business model of investment management. Incremental thinking and
adaptations will not “move the needle” sufficiently.
I The Third Disruption: Traditional investment management is a special case of the
larger financial framework that has been developed and formalized since the 1950s.
The larger framework considers both wealth and consumption from wealth.
Traditional investment management focuses on growing wealth. Retirement
management as a “monthly check” re-introduces minimum consumption in the
financial equation and explores its consequences, starting with the impact that it has
on our primary advisory goal for the client. This means that retirement management
looks at both consumption and wealth and therefore that there are at least two
possible and fundamental views of the topic: one view starts from consumption, the
other viewstarts fromwealth. One viewseeks to set and protect a consumption level,
the other seeks to grow and put wealth to work.
As you will see later in this book, these two views represent active and debating
cultures within RIIA. Because the fundamental equation now includes both
consumption and wealth, the locus of attention for retirement management
(consumption and wealth) is similar and yet different from the locus of attention for
investment management (wealth). The goal of investment management is to expose the
client’s wealth to upside potential subject to a risk profile. The goal of retirement
management is “First build a (minimum consumption) floor, then expose (to wealth
growing) upside.”
This basic idea can also be expressed in many other ways. This optionality of
expressions reflects RIIA’s caution about universally prescriptive statements in this field.
Optional expressions of “First build a floor, then expose to upside” include:
I “Build a floor and expose to upside”
I “If able, build a floor then expose to upside”
I “First insure, then invest”
I “Insure and invest”
I “Cushions before optimization”
PREFACE
© 2013 Retirement Income Industry Association
5
The Place of Flooring in the Conceptual Hierarchy: Where Are We?
The idea of flooring started with the traditional approach to upside investing with
equities. It was conceived as a process to develop a gradual way to migrate an optimized
investment portfolio to a combined retirement consumption and an upside portfolio. RIIA
called this approach to flooring “investment-based flooring” because it provides
recommendations for allocations between upside, flooring, longevity and a reserves
portfolio based on the client’s age, life expectancy, risk profile and capital market
expectations. Given specific values for these parameters, investment-based flooring shows
that the smoothest transition from a traditional investment portfolio to a retirement
portfolio takes place when the calculated flooring allocation for securing retirement income
is closest to the fixed income allocation in the traditional, optimized investment
portfolio. This is why it can be summarized that investment-based flooring makes the
recommendation that the 30% in bonds become incrementally liability-matched. This
is true within a window framed by the specific data elements of the client. Outside that
window, the flooring allocation may be smaller or greater than the bond allocation. Clients
whose flooring allocation requirements are greater than the initial bond allocation become
increasingly “Constrained” and some may even be “Under-Funded” as you will see later
in the book when we discuss RIIA’s household client market segmentation.
The diverging opinions about the value of flooring in practice may derive from the range
of opinions – that cannot be proven a priori – about a practitioner’s (or a client’s) view
of the primacy of the probability of failure vs. the magnitude of failure. Some believe
that the probability of failure looms greater in people's minds than the
magnitude of failure. Others believe that consequences always trump the odds. There
is no way to tell, a-priori, who is right and who is wrong for a specific set of
circumstances whose resolution and outcomes are yet ahead of us.
Some observe that most – if not all – clients cannot tolerate full longevity flooring because
it is too expensive. This is particularly true if one were building such a floor from
financial capital only and in the current Zero Interest Rate Policy (ZIRP) environment.
The implication is that flooring should be ignored for pragmatic reasons and advisors
should keep their focus on upside investing with risk mitigation practices such as Harold
Evensky’s “rolling” or “floating” floor as summarized in Chapter 5 of this curriculum
(customized total return portfolios).
However, when social capital sources of income become unreliable and financial
capital sources of income become too expensive, the solution set can only turn to sources
that derive from human capital: Work longer, save more, delay retirement and, of course,
looking at the liabilities side of the balance sheet, lower lifestyle by cutting expenses
and liabilities.
All of these ideas are good and correct when applied to the right clients in the right
situations. This book is a map to their application across the full household client
segmentation matrix. These divergences are a feature and not a bug in this curriculum
because RIIA seeks to document as complete a range of solutions and adaptations as
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possible to the problems faced by our many and different clients.
RIIA’s consensus at the time of this writing is that, indeed, a “zero-risk” consumption
floor is impractical for many reasons. However, all of us, rich or not, will have to find
a way to generate a minimum consumption floor in retirement. Some will only be able
to rely on their human and social capital. Others may also be able to rely on their
financial capital. Some floors from financial capital will be fragile to the variances of
the mix of risks that apply, so uniquely, to each one of us. In some cases, our efforts to
make specific parts of such floors less fragile to the variance of the matching risks may
be prohibitively expensive.
All recognize that naked exposure to retirement risks, including sequence of returns risk,
will have great negative impacts on some, but not necessarily all, retirees’ actual life
experience. Something needs to be done about it and the solution is not likely to be found
doing “same-old, same-old” investing.
Human capital adaptations – departures from past trends – to expensive consumption
flooring can already be seen in the employment data, suggesting that more people
are working longer than before and certainly longer than expected for many. Social
capital adaptations can be seen in the reported increase of multi-generational
households (grown children living with their parents or the elderly moving in with
their children) as well as in the Social Security, Medicare/Medicaid elections
advisory work performed by some RIIA members who use the Household Balance
Sheet Views
SM
as a map. As we look at the household balance sheet, we see that
clients can not only make adaptations to their three major sources of capital (human,
social and financial) but also to their liabilities. Finally, financial capital
adaptations may be seen with advisors who are moving from a primary focus on
upside portfolio optimization to developing individualized trade-off points that take
the following in consideration:
I The variance of total return solutions (sequence of returns problem)
I The variance of behavioral risks that cannot be diversified in the markets
I The expense of mitigating these variances for the consumption floor
Again, the consensus position is that there is no universally prescriptive solution about
floors, upside and risks. There are many combinations of client exposures to risks and
to their related moments. There are many available process and product solutions on the
table. There may be many more solutions yet to be discovered. Advisors need to
understand their client households, the range of risks/moments they face, the trade-offs
that can be achieved, the valid solutions that they can access and then match them all
with one another to the best of their abilities.
The distinctive value of using “First build a floor, then expose to upside” as an
easily memorized goal is not to imply zero-risk or risk-free exposures for retirees. Instead,
its value is to help us extend our view from a traditional “upside” focus on concave client
exposures (seeking an expected return with long exposures to risky assets whose
© 2013 Retirement Income Industry Association
un-systematic risk can be reduced by diversification in the capital markets) to this
upcoming and rapidly developing “flooring” focus on creating more convex client
exposures to the wider range of risks that affect retiring and retired households. The old
adage, “It is the variance that kills you” is doubly, or perhaps more accurately,
“compoundedly,” true for retirement portfolios.
This book, updated annually, is the record of RIIA’s collective efforts at understanding,
documenting and validating this newand rapidly growing world of retirement management.
As you will see, the curriculum seeks to create a space and a conceptual structure where
all voices that are valid and respectful of one another can be heard and presented in an
organized way. The pressure to improve the collective game increases daily. Every day
and for as many as 17 more years ahead, 10,000 Baby Boomer reach the traditional
retirement age of 65. The book is intended as a repository of RIIA’s collective
knowledge and insights to benefit retiring households, clients, advisors and the companies
that support them.
The History of RIIA’s Body of Knowledge and the RMA Designation: HowDid We Get There?
This book is built on a conceptual hierarchy – a structure that helps us organize our
thinking and find a recognizable and explainable place in it for new and valid ideas –
that is reflected in the organization of its chapters. Think of the conceptual hierarchy as
a Christmas tree on which we can attach ornaments in a practical and recognizable way.
You can read about the organization of the chapters in the next section, “The One-Minute
Summary of the Book.” Before you go there, and in order to help you place the
organization of the book in context, it is helpful to understand the developmental
history of the curriculum.
Curriculum development started before the 2006 foundation of RIIA. It was based on
work that Ben Williams and François Gadenne developed as co-founders of both Rational
Investors, Inc. (1996/1999) and Retirement Engineering, Inc. (started 2001). Dr. Zvi Bodie
was an influential advisor with both start-up companies.
As shown in the chart on the next page, the first step in curriculum development (2007)
was the development of the Retirement Management Professional (RMP) job
description with the help of several head-hunter members in general and George Wilbanks
(then at Russell Reynolds) in particular.
When Dr. Moshe Milevsky and Gil Weinreich (editor of Research Magazine) asked François
Gadenne to write a column from 2008 to 2010, at the same time that RIIA’s Education
Committee was formalizing the Retirement Management Professional job description and
the matching structure for the Retirement Management and Retirement Income Body of
Knowledge, each column became an opportunity to document and to test publicly some of
the key ideas.
When Nationwide (2008-2009) decided to embrace the Body of Knowledge for a
Customized Institutional Program (CIP), the columns became the seed that turned into
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Version 1.0 of this book.
When Dr. Michael
Zwecher and François
Gadenne collaborated in
2010 to launch the RMA
designation, both Version
2.0 of this RMAcurriculum
and Dr. Zwecher’s
“Retirement Portfolios”
book were written and
edited in parallel, sharing
material back and forth
including moving all the
“cases” into the book.
You will see that this 5th
edition brings cases back
into this book and presents
them in two forms: Short
Form Cases and Long Form Cases. Short Form Cases start with the consumption from
financial wealth idea, use a minimum number of variables and
progressively relax constraints and assumptions to include consumption from social
capital, the option of longevity insurance and specific assumptions about risk aversion.
Short Form Cases bridge to the Long Form Cases by way of a detailed Fact Finder and
Case Evaluation Template. Simplifying assumptions are now expanded with the messy
and complex reality of real life examples. Long Form Cases also use the
quantitative benchmarking data from the Household Balance Sheet Views
SM
research
project that was created in 2012 by RIIA’s Research Business Unit and under the
guidance of the RMI (RIIA’s Market Insight) Governance Board.
One of the lessons from comparing the Short Form Cases to the Long Form Cases is that
advisors do learn from the concepts in this book by finding ways to apply them, not only
quantitativelyandpreciselythroughsophisticated models, but alsoqualitativelyandaccurately
with respect to specific situations. Equations must be precise but life rewards accuracy.
Back in 2010, the implementation of “First build a floor, then expose to upside” was
primarily focused on the idea of "investment-based flooring," a gradual approach that
builds upon our traditional understanding of investment management. Investment-based
flooring starts with the traditional 60/30/10 portfolio. RIIA’s attention was still focused
on the wealth side of the fundamental equation.
In 2011, because of the leadership and sponsorship of Allianz Global Investors and the
inspired involvement of Bruce Wolfe, then Managing Director, RIIA launched the
PRE FACE FI GURE A: RI I A 2007 – THE RE TI RE ME NT BODY OF KNOWL E DGE
PREFACE
© 2013 Retirement Income Industry Association
9
Retirement Management Journal (RMJ) under Robert Powell’s direction as editor and
publisher. The RMJ documents the leading-edge thinking in retirement income and
retirement management. It also grants a Practitioner Thought Leadership Award during
RIIA’s Spring Conference and an Academic Thought Leadership Award during RIIA’s
Fall Conference. Finally, the best papers often become required readings as appendices
in this curriculum book.
In 2011, the Depository Trust & Clearing Corporation (DTCC), under the leadership of
Adam Bryan, completed the development of a multi-year project that is at the core of
RIIA’s Market Insight (RMI) research program. This project tracks online and in
real-time “who sells what retirement product and to whom” using the CUSIPs in the DTCC
transaction settlement flow, starting with the insurance industry 5,000+ CUSIPs. Elvin
Turner, director of the RIIA’s research business unit, assembled a collective of the best
research companies around this capability, including PwC(Anand Rao, Louis Lombardi),
E&Y(Gerry Murtaugh, Chris Raham), SBI (Larry Cohen), Cannex (Lowell Aronoff and
Gary Baker), Greenwald and Associates (Matt Greenwald), Brightwork Partners (Ron
Bush), Sagence (Joy Masterson) and many others. Over time, key RMI deliverables find
their way into the RMAcurriculum. For instance, this 5th edition brings the application
of RIIA’s Household Balance Sheet Views
SM
and RIIA’s Household Balance Sheet
Benchmarks
SM
into the curriculum.
In the 4th edition (2012), with the decisive help of Dr. Michael Finke and Dr. Wade Pfau,
RIIA documented the integration of the "goals-based flooring" approach in the
curriculum as a distinct practice that becomes very helpful with clients that need to
allocate more than 30% of their portfolio towards flooring. The focus of RIIA’s
attention shifted to the consumption side of the fundamental equation. Preface Figure
B (next page), illustrates the links between the third disruption, investment portfolios,
goals-based flooring, investment-based flooring and the retirement portfolios.
One of the core problems of retirement management in the present era is that ZIRPmakes
flooring prohibitively expensive because interest rates/yields/discount rates are so low.
Goals-based flooring helps us find solutions, outside of the traditional 60/30/10
framework, when the client does not have enough savings and/or when the “ZIRP-ed”
markets cannot generate sufficient yield in order to maintain a 60% equities allocation.
Goals-based flooring helps us expand our focus from simplifying consumption as a
percent of financial wealth to expanding our understanding (and complexity) of it,
including:
I A view of wealth that includes other sources of capital (human, social, financial)
I Detailed household budgets/income statements
I Working with the household’s budget as well as its assets
I Bringing tax considerations into the planning process
I Including healthcare in the planning process
I Detailed household balance sheet
I Working with the liabilities side of the balance sheet
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Retirement-management adaptations to the problem of insufficient assets to provide
flooring (Underfunded households) include many creative product and process
innovations, including use of the “mortality credit,” inclusion of alternative investments
such as leveraged rental real-estate and “floating floors” (as developed by Harold Even-
sky and included in the curriculum). These adaptations help ensure that the flooring
allocation, away from equities, can be kept to a manageable level.
In September, 2012, Morningstar’s research on “Gamma” – a concept that builds on invest-
ment “Alpha” and “Beta” – developed by David Blanchett and Paul Kaplan, revealed
the existence of a potential and large number of basis-points “lift” that comes from good
process management, defined as a combination of five specific planning techniques. This
finding is a timely reinforcement of an observation anchored in the history of RIIA’s
membership.
From 2006 to 2009 the leading business silo of RIIA’s “View Across the Silos”
association was the mutual funds industry. Its members were looking for an investment
product solution to the retirement problem. RIIAdiscovered that better asset allocation among
risky assets was not sufficient as a retirement product holy grail. From 2009 to 2012, the
leading business silo became the life companies. Its members were looking for an
insurance product solution to the retirement problem. RIIAdiscovered that ZIRP and the
requirement for capital reserves may cause a problematic demand/supply maladjustment.
Since 2012, the leading business silos are the distributors, including RIAs, hybrids, B/Ds
and banks. They are looking for a process solution to the retirement problem.
PRE FACE FI GURE B: CL I E NT DATA AND CL I E NT SE GME NTATI ON
PREFACE
© 2013 Retirement Income Industry Association
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As an example of this trend, Tom Marra (Symetra) and Rich Moran (Symetra
Investment Services) reached out in 2012 to announce that after an extensive analysis
of existing retirement organizations and designations they chose to “support and help
grow RIIA.” When pressed as to why, the answer was so good that RIIAnow uses it as
a standard summary of what the RMAstands for. Their answer was that the RMAwould
help them grow their business because it was:
I Household centric
I Product agnostic
I Process driven
In this 5th edition, written under the guidance of Dr. Peng Chen – Chair of the RMA
CurriculumAdvisory Board – our current thinking is that retirement planning may best
start with process solutions. Given such process solutions, as described in this
curriculum, current investment and insurance products can be used to great mutual
benefit between the industry, the advisors and the clients – especially when one considers
the entire household balance sheet and realizes it is a map to unexpected and powerful
product combinations.
As you will see in this edition, we currently organize retirement risks and risk-management
techniques as shown on Preface Figure C (below, right).
In addition, as shown on Preface Figure D (next page), we map the process approaches
and product solutions that we have validated using the framework of these risk-management
techniques (retention, management, pooling, avoidance and barbelling).
We also organize the
solutions and process
approaches that we have
validated in two categories
that reflect the source of
their creation – engineering
and economic:
I Engineering process
approaches (e.g.
Zwecher’s Flooring,
Evensky’s Floating
Floor/Cash Flow
Reserves, Income
Ladders, Systematic
Withdrawal Plans,
Time Segmentation,
etc.)
I Economic process
approaches (e.g.
Bodie’s TIPS/Calls
PRE FACE FI GURE C: RI S K PROF I L E AND RI S K MANAGE ME NT TE CHNI QUE S
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Portfolio, Kotlikoff’s Consumption Smoothing, etc.)
Finally, a third category, empirical flooring allocations, is potentially RIIA’s most
important contribution to our community as we may be able to create standards for risk-
management technique allocations for key household client market segments, similarly
to what happened many years ago in the investment industry with the creation of 60/30/10.
As shown on the chart at
left, empirically validated
“flooring allocations” are a
general method to describe
all solutions and process
approaches, as you’ll see in
Chapters 5 and 7 (sections
5.4.f and 7.1.c in
particular).
To paraphrase one of
the RMA graduat es,
somewhere on t he
continuum between better
risky-asset allocations and
life-cycle theories, one may
fi nd t he pract i cal ,
h o u s e h o l d - c e n t r i c
sol ut i ons. Today, as
evidenced with this 5th
edition, we continue to
explore “what are the key
decisions?” and “who owns them?” so that this curriculum thrives as a relevant,
innovative and growing body of knowledge that helps you improve your retirement
practice and the life-long outcomes of your household clients. In this spirit, the 5th
edition introduces a third fundamental planning strategy. In addition to investment-based
and goal-based planning, RIIAhas also added product-based planning strategies for those
clients and circumstances (e.g. Defined Contributions) where the advisors cannot see
the entire household balance sheet.
During RIIA’s 2013 Spring Conference where the draft version of this book was released
for review by the RMA certificate holders in good standing who took the event’s
continuous education class, Tim Murphy, president of Investors Capital, announced
during his presentation that he was enrolling 500 advisors on the RMA education
program and that he is taking a lead role on the RIIA Board to help other members do
the same thing.
In this spirit of continuous improvements and improved outcomes, one of the key
improvements in this 5th edition is the continuing formalization of our Retirement
PRE FACE FI GURE D: THE RE TI RE ME NT MANAGE ME NT POL I CY STATE ME NT AND
THE PROCE S S/PRODUCT TRE E
© 2013 Retirement Income Industry Association
Policy Statement. As you can see, below, with this Household Retirement Policy
Statement – and as seems to be true with so many aspects of retirement planning vs.
investment planning – it is similar to and yet different from a Client Investment Policy
Statement:
I Retirement policy statement
I Summary of client-provided data
• Current status of client household (Overfunded, Constrained,
Underfunded)
• Income statement and balance sheet summaries
• Mapping of systematic and un-systematic risk exposures, including unique
circumstances
I Summary of advisor-provided data
• Capital market expectations
• Household Balance Sheet Benchmarks
SM
and projections
I Key policy decisions
• Level of data gathering: Incremental or comprehensive
• Frequency of monitoring: Quarterly, annually, other
• Sensitivity of risk management thresholds: Low, high
• Type of financial capital strategy: Dissipative of capital or conservative
of capital
• Type of retirement planning strategy: Investment-based, goals-based,
product-based
• Style of flooring determination: Formula-based, simulation-based, conceptual-
based
• Length of flooring: Life-contingent, period-certain, floating
• Solidity of flooring: Guaranteed, uncertain
• Expense of flooring: High, low
• Flooring implementation: One portfolio, multiple portfolios
I Strategic choices of risk-management techniques allocations (flooring
allocations)
• Retention – Upside portfolio (%)
• Management – Flooring portfolio (%)
• Pooling – Longevity portfolio (%)
• Avoidance – Reserves portfolio (%)
I Tactical selection of implementation processes
• Engineering process approaches
– Customized total return portfolios
– Systematic withdrawal plans
– Time segmentation
– Floor/upside
– Ladders
– Cash reserves
• Economic process approaches
– Consumption smoothing
– Options
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– Risk transfer
– Barbelling
I Execution
• Account choices
• Product selection
• Planned implementation steps
• Planned implementation schedule
The retirement policy statement is a good example of the spirit of the RMA: RIIAseeks
to document all valid approaches, match them to the relevant client segments and over
time with the RIIAEmpirical Validation Framework (EVF) highlight the approaches that
work best given all existing constraints including client behaviors, market behaviors, costs
and regulations.
What is the Meaning of the RMA Designation?
RMAcandidates who…
I Study at one of the approved university programs
I Pass the RMAexamination
I Stay current on their CE requirements
…are expected to have reached a minimum threshold of competence to provide
comprehensive, household-focused retirement planning without supervision.
This is only a minimum threshold and the first step in a career-long search for
development and expertise that can only come from daily work with household clients.
Our clients are our ultimate teachers and graders.
RIIA’s individual and collective competence focuses on ethics; please take note of
Section 7.4 of this book, the RMA Code of Ethics and Professional Responsibility, as
well as the Manual for Compliance Officers. Trust is earned as a
combination of being free of conflicts, demonstrating competence and acting
transparently. What RIIAdoes reflects on you. What you do reflects on RIIA. RIIAworks
hard to earn, to preserve and to keep your trust. RIIAexpects you to work hard to earn,
to preserve and to keep your client’s trust.
Upon successful completion of the RMA program, graduates receive the following
benefits:
I Free subscription to the Retirement Management Journal (PDF version) to keep
current on RMAcontinuing education requirements
I Deeply discounted registration to RIIAconferences
I Discounted full individual membership in RIIA (Note: RIIA membership is not
necessary to be an RMAcertificate holder in good standing)
I Eligibility to join the Practitioners Peer Review Committee for the Retirement
Management Journal
PREFACE
© 2013 Retirement Income Industry Association
15
Prerequisites or Experience Required to Obtain the RMA
In general, RMA candidates already have demonstrated knowledge and experience in
the practical application of basic retirement planning and investment principles.
Typically, we look for at least three (3) or more years of experience as a financial
advisor working with clients broadly on retirement and non-retirement portfolios, or
comparable experience in the financial services industry directly involved in the
retirement and investments business. Holding various FINRA registrations, e.g. series
7, 24, 63, 65, or 66, as well as other designations, e.g. CFA, CFP
®
, etc. will all be
considered as evidence of prerequisite knowledge.
Candidates for the RMAdesignation must:
I Read the following books, and become familiar with the level of detail, that is
summarized in the RMAcurriculum book:
I The current edition of the the RMAcurriculum book
I Retirement Portfolios: Theory, Construction and Management, by Dr. Michael
Zwecher
I Retirement Portfolios: Workbook, by Dr. Michael Zwecher
I Retirement Income Redesigned: Master Plans for Distribution – An Adviser's
Guide for Funding Boomers' Best Years, edited by Harold Evensky and Deena
B. Katz
I Risk Less and Prosper: Your Guide to Safer Investing, by Dr. Zvi Bodie and
Rachelle Taqqu
I Control Your Retirement Destiny: Achieving Financial Security Before the Big
Transition, by Dana Anspach
I Antifragile: Things That Gain from Disorder, by Nassim Nicholas Taleb
I Pass a RIIA-approved education program such as:
I The Retirement Management Program at Boston University's Center for
Professional Education
I Salem State University's 5-day in-class intensive seminar
I The Intensive Retirement Management Seminar at Texas Tech University
I Complete the RMA application and certify that the information in the application
is accurate. Further, candidates must certify that they have not been fined nor
sanctioned from practicing in the financial services field by any state or federal
government, regulatory authority, by any industry self-regulatory body or by any
employer
I Pay the initial RMA certification fee of $395, which includes the annual
certification fee, plus the one-time examination fee. Subsequent annual certification
fees are just $295, which includes an eSubscription to the Retirement Management
Journal (RMJ)
I Sit for and pass the RMAexamination
Three Universities Now Support Preparation for the RMA Designation
I The Retirement Management Program at Boston University's Center for
Professional Education (BUCPE). The BUCPE program is a 5-week, interactive
web-based curriculum offering the flexibility to take the class when and where you
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THE CONTENT OF THIS BOOK DOES NOT PROVIDE INVESTMENT, FINANCIAL OR TAX ADVICE AND SHOULD
NOT BE USED TOMAKE ANY INVESTMENT DECISIONS. THE AUTHORS DONOT ADVOCATE THE PURCHASE
OR SALE OF ANYSECURITYOR INVESTMENT, NOR DOTHEYENDORSE OR SPONSOR ANYPRODUCTS, GOODS
OR SERVICES THAT MAY BE REFERRED TOHEREIN. THE READER SHOULD ALWAYS SEEK THE ASSISTANCE OF
A PROFESSIONAL FAMILIAR WITHHIS OR HER OWNPERSONAL CIRCUMSTANCES FOR TAX, FINANCIAL AND
INVESTMENT ADVICE.
want within the semester dates. The cost is $1,295. Contact BUCPE directly for
scheduling and more information or call 1-800-329-4996.
I Texas Tech University (TTU) offers a 5-day, in-class customized seminar taught
by its Ph.D. faculty that includes lectures and lab assignments. The class is offered
in Lubbock, TX on the TTU campus and runs Monday morning through Friday with
the course exam on Saturday morning. The cost is $1,975 (includes hotel Sunday -
Friday nights). The seminar is scheduled to be offered twice a year (Spring and Fall).
For more information, contact Michael Finke, Associate Professor and Director of
the Personal Financial Planning Ph.D. program.
I Salem State University (SSU) in Salem, Massachusetts offers a 5-day in-class
intensive seminar during the summer. This SSU “boot camp” specializes in
training clients and advisors who want to become RMAinstructors. The cost is $1,575
and includes refreshments and lunch. On campus lodging is available for an
additional fee. Contact Andrea Swirka at Salem State University, Professional and
Community Enrichment Programs for more information.
All approved education programs must teach to the curriculum to keep their approval
which is granted annually. Each program achieves differentiation in the marketplace by
adding packaging options, reading materials, access to expert faculty members, access
to Teaching Software Platforms, etc., based on the unique strengths of their institutions,
staff and program design. As you will see in the material on RIIA’s Distribution
Channels Segmentation Matrix, RIIA seeks to match approved education programs to
channels so that everyone can find practical and proper access to this material.
Special Pricing and Customized Programs are Available for RIIA Member Firms
This is a powerful, cost-effective way for companies to provide state-of-the-art training
for advisors, wholesalers or other key employees.
RIIA member firms who are interested in training at least 50 employees can obtain
discounted pricing on both the required educational program and the RIIA1st year RMA
certification fee. Additionally, RIIAcan provide an additional day of exam preparation
and an on-site proctored examination for your RMAcandidates at no additional cost. Please
contact us at either [email protected] or [email protected] for more details and to design
a program that best works for you. I
TABLE OF CONTENTS
Table of Contents
© 2013 Retirement Income Industry Association
17
Preface 3
What Is This Curriculum and Why Does it Matter to Your Advisory Practice? 3
The Three Disruptions: Why Are We Here? 3
The Place of Flooring in the Conceptual Hierarchy: Where Are We? 5
The History of RIIA’s Body of Knowledge and the RMADesignation:
How Did We Get There? 7
What is the Meaning of the RMADesignation? 13
Prerequisites or experience required to obtain the RMA 14
Three Universities Now Support Preparation for the RMADesignation 15
Special pricing and customized program are available for RIIAmember firms 15
The ‘One-Minute’ Summary of the Book 23
Who This Book Is For 23
Build a Floor and Create Upside Potential 23
The Hub and Spoke Model 24
The Hub at the Center of the Advisory Process – The Client 24
Spoke One: The Household Balance Sheet is the Start of a Life-cycle Plan 24
Spoke Two: Cash Flows and the Completion of the Life-cycle Plan 25
Spoke Three: Retirement Risk Mapping and Flooring Allocations 25
Spoke Four: Flooring Allocations and the Retirement Policy Statement 25
Spoke Five: Specific Products to Implement the Plan and Allocations 25
Putting It Together: Presenting and Monitoring the Plan 26
Chapter 1: The Hub at the Center of the Advisory Process – The Client 27
1.1.a The Hub of the Advisory Process – The Client 27
1.1.b Working with Seniors 31
1.1.c What is Your Learning Identity? What is Your Client’s
Learning Identity? 33
1.1.d Helping Clients Leave Their “Comfort Zones” 37
1.1.e Morningstar’s Gamma: The Value of Process 41
1.2 The Accumulation Perspective 47
1.3.a The Retirement Perspective 49
1.3.b Definitions of Key Terms, Assumptions and “RMA-isms” 55
1.4.a Three Kinds of Retirement Clients 67
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1.4.b Calibrating the AUMAxis 73
1.4.c Three Kinds of Retirement Clients – ABalance Sheet
Perspective (A/L Ratio) 77
1.5 Available Client Data Drives the Process 81
1.6 The Distribution of Wealth in America 87
1.7 Recapitulating Where We Are in the Process 95
1.8 Sources and Resources for Chapter 1: The Hub – The Client 97
Chapter 2: The First Spoke – The Household Balance Sheet is the Start of the
Life-cycle Plan 99
2.1 Spoke One: Life-cycle Plan, Part I – The Balance Sheet 99
2.2 Benefits of Focusing on the Household 103
2.3 Assets Minus Liabilities Equals Owner’s Equity 107
2.4.a AHousehold’s Three Sources of Capital 109
2.4.b Revisiting the Three Legged Stool of Retirement 111
2.4.c Advising a Client on Their Human Capital 115
2.5 Helping Clients Understand Household Finance 119
2.6 Types of Financial Capital 121
2.7 Data-Gathering Methodologies for Household Statements 123
2.8 Top-Down Estimates 127
2.9 Bottom-Up Estimates 129
2.10 Detailed Household Balance Sheets 131
2.11 The Life-cycle View of the Household Balance Sheet 135
2.12 Dynamic Stochastic Optimization or Present Values on the
Balance Sheet? 137
2.13 Pensions – Social Capital or Financial Capital? 141
2.14 Estate Planning 143
2.14 Recapitulating Where We Are in the Process 145
2.15 Sources and Resources for Chapter 2: Spoke One – The Balance Sheet 147
Chapter 3: The Second Spoke – Cash Flows and the Completion of the
Life-cycle Profile 149
3.1 Spoke Two: Life-cycle Plan, Part II – Cash Flows 149
3.2 What Portion of Annual Consumption Must Come
from Financial Capital? 153
3.3 The Basic Household Budget 157
3.4 Expenses – Fixed vs. Discretionary 161
3.5.a Detailed Household Income Statement/Budget 163
3.5.b Tax-Bracket Planning 167
3.5.c Tax Optimization 173
3.6.a Improving Mortality: HowLong Does the Plan for the Floor Need to Last 177
3.6.b The Life-cycle View of Distribution Curves and Life Events 181
3.6.c Retirement Aha Moments 183
3.6.d The New Retirement Era 193
3.6.e Boomer Statistics 197
© 2013 Retirement Income Industry Association
3.6.f Rising Healthcare Costs 199
3.6.g Out-of-Pocket Expenses 203
3.6.h Long-Term Care Planning 207
3.6.i Medicare 211
3.6.j The State(s) of Medicare 215
3.6.k Social Security 219
3.6.l Pensions 229
3.6.m The Future 231
3.7 Recapitulating Where We Are in the Process 233
3.8 Sources and Resources for Chapter 3: Spoke Two – Cash Flows 235
Chapter 4: The Third Spoke – Retirement Risk Mapping and Flooring Allocations 237
4.1 Spoke Three: Assessing Retirement Risks 237
4.2 Managing AWider Range of Risks to Establish the Floor 241
4.3 The Retirement Risk Profile 243
4.4 AStressful Transition Due to Changing Priorities 247
4.5 Taxes are a Major Retirement Risk 249
4.6 Credit Risk is a Major Retirement Risk 253
4.7 Health Care Cost Uncertainty is a Major Retirement Risk 255
4.8 RIIA’s Retirement-Income Risk Framework: Mapping Risk
Exposures 257
4.9 Risk Aversion Profiles Affect the Shape of the Distribution Curve
Over the Life Cycle 261
4.10.a Transitioning From the Risk Exposure Maps to Allocations Among
Risk-Management Techniques 265
4.10.b Black Swans and the 4-block Risk Management Approaches Matrix 269
4.11.a Determining the Flooring Allocation: The Formula View of Flooring 273
4.11.b Determining the Flooring Allocation: The Importance of Flooring
Later in Life 281
4.11.c The Empirical Flooring Allocations 285
4.12 Recapitulating Where We Are in the Process 289
4.13 Sources and Resources for Chapter 4: Spoke Three – Retirement
Risk Profile 291
Chapter 5: The Fourth Spoke – Flooring Allocations and the Retirement Policy
Statement 293
5.1 Spoke Four: Managing Retirement Risks 293
5.2 RIIA’s “First Build a Floor, then Expose to Upside” Goal
is Compatible with MPT 297
5.3.a Two Basic Approaches to Creating Optimal Floor and
Upside Portfolios 301
5.3.b The Conceptual Hierarchy: Why Flooring is a Higher Conceptual
Level than Asset Allocations, Annuities, SWPs, Time Segmentation,
Ladders, Reserves and Options 305
5.4.a The Engineering Process Approach 307
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5.4.b Deciding When to Focus on Flooring with Mike Zwecher’s
Engineering Process Approach 311
5.4.c Introducing the Evensky & Katz Cash Flow Reserve Strategy 317
5.4.d Time Segmentation 321
5.4.e Systematic Withdrawal Plan 327
5.4.f Managing the Retirement-Income Portfolio – The ViewAcross
Engineered Retirement-Income Strategies 329
5.8.g Engineering Income Floors and Mitigating Retirement Risks
With Dedicated Portfolios 343
5.5.a The Economic Process Approach 355
5.5.b Introducing Zvi Bodie’s and Rachelle Taqqu’s Risk Less and
Prosper: Your Guide to Safer Investing 357
5.5.c Modern Retirement Theory 361
5.5.d What Does Consumption Smoothing Add to Creating Optimal
Portfolios? 369
5.5.e What Does Behavioral Finance Add to Creating Optimal
Portfolios? 377
5.5.f What Do Monte Carlo Simulations Add to Creating Optimal
Portfolios and Why Is “60/30/10” too Risky for Retirement? 381
5.5.g Beware the Black Swans (and the Dragon-Kings!) 385
5.6 The Retirement Policy Statement 389
5.7 Recapitulating Where We Are in the Process 395
5.8 Sources and Resources for Chapter 5: Spoke Four – Risk
Management Allocations 397
Chapter 6: The Fifth Spoke – Account Location Choices and Product Selections 399
6.1 Spoke Five: Choosing The Right Accounts and Selecting the
Right Products 399
6.2.a APractitioner’s View: From Flooring Allocations to
Implementation Processes to Account Selection 401
6.2.b The Universe of Account and Regulatory Vehicles 403
6.2.c Account Vehicle Definitions 405
6.3.a RIIA’s RMACurriculum: From Flooring Allocation and
Implementation Processes to Retirement Product Selection 409
6.3.b Key Characteristics of Flooring Products 413
6.3.c Thematic View of Flooring and Upside Products 415
6.4.a The Universe of Flooring and Upside Products 417
6.4.b The Impact of the Three Disruptions at the Product Level 421
6.4.c Specific Products to Implement the Plan and Allocations 425
6.4.d Product Definitions 433
6.5 Recapitulating Where We Are in the Process 441
6.6 Sources and Resources for Chapter 6: Spoke Five – Products 443
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Chapter 7: Putting It Together: Presenting and Monitoring the Plan 445
7.1.a Bringing the Process to Closure 445
7.1.b RMPs are Professionals 449
7.1.c RIIA’s Body of Knowledge as a Derivitive of the RMP
Job Description 453
7.1.d The Differentiation Value of the Designation 457
7.2 Ethics 461
7.3.a What Is Trust? 463
7.3.b The Saliency of Trust in the Current Crisis 467
7.4 Retirement Management Analyst (RMA) Code of Ethics
and Professional Responsibility 469
7.5.a Introduction to the Accumulation and the Retirement
Income Toolboxes 483
7.5.b The Importance of Your Frame of Mind 487
7.6.a Integrating Education, Experience and Ethics with Examples 491
7.6.b How to Evaluate Long Form Cases Using the Curriculum Material 493
7.6.c ACase Study 507
7.7.a The Importance of Process Transparency 521
7.7.b Introduction to Product and Solution Management 525
7.7.c Practice management Guidelines for RMPs 529
7.7.d Typology of Financial Professionals 533
7.8 Sources and Resources for Chapter 7: Putting It Together 539
Glossary 541
Note: Prior editions included several pages of acknowledgments to RIIA’s Board
members, Special Advisors, Business Unit Directors, Committee Chairs and Members.
One of our graduates told us, “My inventory is my time”.
It is with this comment in mind that we moved these acknowledgements pages, as well
as the list of your fellow RMA Graduates in good standing, to the RIIA website under
the “Membership” tab so that we can present you with the most complete and up-to-date
lists at all times. I
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ONE- MI NUTE SUMMARY
The ‘One-Minute’ Summary of the Book
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Who This Book Is For
Financial professionals, including asset managers, licensed agents and representatives
of broker/dealers, registered investment advisors and certified financial advisors (both
in the retail and the employer-sponsored plan sectors) can expect this book to help them:
I Organize their thoughts about their clients’ financial situations
I Reach conclusions about their clients’ retirement-income needs
I Recommend appropriate retirement-income plans
I Explain why the plans make sense
I Implement the plans by changing the clients’ allocations to risk-management
techniques, thus enabling them to purchase a better mix of products
I Take the examination for RIIA’s RMAdesignation
This book also contains “RMA-isms” that will be defined as we progress through the
chapters, including:
I Overfunded, constrained and underfunded
I Goal-based planning, investment-based planning and product-based planning
practices
I Household Balance Sheet View
SM
and Household Balance Sheet Benchmarks
SM
I Human capital, social capital, financial capital, liabilities
I Consumption, fixed and discretionary expenses
I Risk exposure mapping of systematic and un-systematic risks
I Risk-management techniques (flooring allocations)
I Engineering and economic process approaches, including floor/upside, custom total
return portfolios, SWPs, ladders, time segmentation, etc.)
I Account location choices and product selections (product types include: assets/
products that wrap the market, “risk-free” assets, products that wrap the mortality
credit, reverse mortgages, leveraged rental real estate, options/derivatives, structured
products, etc.)
I Accumulation vs. distribution toolboxes
I Retirement Management Professional (RMP)
I Retirement Management Body of Knowledge
I Retirement Policy Statement
Build a Floor and Create Upside Potential
Most investment professionals specialize in managing client assets, with an eye toward
maximizing accumulation during the clients’ working lives. The duties of Retirement
Management Professionals, however, are broader. These advisors need to manage their
clients’ assets, liabilities and cash flows, with an eye toward minimizing a broad range
of risks during their clients’ retirements.
RIIAdeveloped a hub-and-spoke framework to organize retirement-income solutions.
The framework has seven chapters – a hub, five spokes and an integrative process. The
client is the hub, and the spokes are the steps in a process of integration and
monitoring. RIIA calls them “spokes” rather than “steps” for two reasons. First, they
represent a cyclical process of interaction with the client that has no specific beginning
or end. Secondly, each one strengthens the relationship between advisor and client.
The objective is to build a floor and create upside potential. RIIAassumes that, during
retirement, clients need a sufficient level of income (“a floor”) from guaranteed or
low-risk sources, as well as the potential for growth through exposure to risky assets (the
“upside”).
Building a portfolio for retirement income isn’t necessarily harder than building a
portfolio for asset accumulation, but it does require a deeper assessment of the client’s
needs. The investment of more time at the beginning of the relationship can pay off,
however, in the creation of satisfied clients whose assets will be “stickier” and who will
bring additional advisory opportunities.
The Hub and Spoke Model
The Hub at the Center of the
Advisory Process – The
Client
Intuitively enough, the
client stands at the center or
“hub” of the process.
However, the retirement
client segmentation is not
based on Assets Under
Management (AUMs) only
but on a ratio of the client’s
annual consumption in
retirement to their financial
capital.
The primary quantitative
objective of Chapter 1/The
Hub is to calculate a first-
SUMMARY FI GURE A: THE RI I A HUB AND SPOKE MODE L
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Balance
Sheet
Cash Flow
& Life-cycle
Profile
Retirement
Risk
Mapping
Risk
Management
Allocations
Accounts &
Products
Client
Relationship
ONE- MI NUTE SUMMARY
© 2013 Retirement Income Industry Association
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order estimate of the client’s consumption from financial capital to financial capital ratio.
Inputs for this calculation include an estimate of the client’s current financial capital and
his or her expected annual consumption level in retirement. Outputs from this
calculation categorize the client as underfunded, constrained or overfunded. This first-
order estimate will be revised as we move through the spokes. This core level of analysis
focuses on averages and can also be refined with an advanced-level analysis including
a specific year-by-year simulation.
Spoke One: The Household Balance Sheet is the Start of the Life-cycle Plan
Focusing first on the household’s balance sheet, analyze the client’s income statement
(current income vs. current expenses), balance sheet (assets vs. liabilities) and cash flow
statement (a snapshot of cash inflows and outflows). This is the first step towards
creating a life-cycle plan. This can take place before, at or after retirement, but the
earlier, the better. It is important to remember the difference between cash flowand income,
our goal is to maximize positive cash flow.
The primary quantitative objective of Chapter 2/Spoke One is to calculate a first-
order estimate of the client’s household balance sheet. Inputs for this calculation
include asset balances (e.g., financial assets and bank balances) as well as
expected taxable and non-taxable cash flows. Inputs also include liabilities, such
as mortgage balances, expected annual consumption in retirement, desire for a
bequest, etc. Finally, inputs for this calculation include discount rates/expected returns.
Outputs from this calculation are shown as a household balance sheet with projected
and discounted values as of the client’s retirement date.
Spoke Two: Cash Flows and the Completion of the Life-cycle Profile
Match the client’s anticipated social capital (e.g., Social Security, pension income), human
capital (e.g., income from work in retirement) and financial capital (investments) with
his or her income statement, balance sheet and cash flows. The advisor determines the
portion of the client’s minimum income or “floor” that social and human capital can
provide, and how much will need to come from financial capital. This step completes
the creation of life-cycle plan projections.
The primary quantitative objective of Chapter 3/Spoke Two is to refine the cash flow
inputs that derive fromthe client’s household balance sheet. Inputs include personal income/
earnings as well as taxes, fixed expenses and discretionary expenses. Outputs are shown
on both the client’s household income statement and balance sheet.
Spoke Three: Retirement Risk Mapping and Flooring Allocations
Turn the life-cycle plan into a retirement-income plan that matches the income from the
client’s three sources of capital to the potential costs associated with the client’s
identifiable retirement-income risk factors (e.g., health risk, inflation risk, longevity risk,
etc.).
The primary quantitative objectives of Chapter 4/Spoke Three are to determine the client’s
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risk exposures (systematic and un-systematic) and to calculate the portion
(percent and dollar) of his or her financial portfolio that should be dedicated to
flooring. In addition to identifying risks and estimating risk aversion, inputs include the
client’s current age, desired retirement age, life expectancy and various inflation and
discount factors. Outputs are the client’s portion of his or her financial portfolio that should
be dedicated to flooring.
Spoke Four: Flooring Allocations and the Retirement Policy Statement
Using the client’s financial capital, create an income floor through the allocation of risk-
management techniques that are compatible with the client’s risk profile. Then, with any
remaining assets, create an upside. Flooring allocations will guide the choice of process
approaches leading to account location choices and product selections.
Chapter 5/Spoke Four customizes validated process approaches (engineering and
economic). The primary quantitative objectives of Chapter 5/Spoke Four are to
determine the portions of the upside, flooring, longevity and reserve portfolios and to
match themwith one or more process approaches. Inputs were developed in prior spokes.
Outputs are the percent and dollar portions of the flooring allocations and process approach
recommendations.
Spoke Five: Account Location Choices and Product Selections
Chapter 6/Spoke Five provides a high-level mapping of available accounts and
product types for each of the four risk-management techniques. This provides guidance
to the financial advisor who – within the constraints of his or her chosen process approaches
– can then exercise his or her best professional judgment to implement and
manage the flooring and upside portfolios.
Putting It Together: Presenting and Monitoring the Plan
The advisor integrates findings and recommendations into a plan that can be easily
presented to and understood by the client. This integration brings together the Code of
Conduct and the Retirement Policy Statement. I
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