What You'll Learn In Today's Episode:

  • Warning signs that clients may not be a good fit.
  • How to be intentional with the rules we are setting.
  • How to manage risk tolerance.
  • The importance of not investing emotionally.
  • How to deliver value-adds.
  • What to do when a client wants to take out a large amount of money.

Today Matt and Micah are addressing a topic they receive lots of questions about: income buckets. In light of the current bear market, the guys will share how best to communicate with your clients about their “war chests” throughout the good times and even now, during the current crisis.

Listen in to learn the importance of setting realistic rules and living within those rules in order to avoid future panic. Matt and Micah break down how to manage risk tolerance, the importance of not making emotional investments, and much more.

Resources In Today's Episode:

EP. 73 TRANSCRIPT

This is The Perfect RIA, in case you didn’t know. Bringing you all the strategies to help your business grow. Are you happy? Are you satisfied? Are you hanging on the edge of your seat? Sit back and listen in while you feel the beat. Another myth bites the dust…

Matthew Jarvis:  Hello everyone and welcome to another episode of The Perfect RIA podcast. I’m your cohost, Matthew Jarvis, and with me as usual, the man, the myth, the legend, Micah Shilanski. Micah, how are you today?

Micah Shilanski:  I’m doing excellent, Jarvis, and this is our video cast for our backstage pass members. They are getting full video access and I don’t know if that’s a benefit to them, just to be fair, but it’s something different.

Matthew Jarvis:   Yeah, we’re going to try this out a few times. You’ll have to remind me to pay attention even when you’re talking.

Micah Shilanski:  Normally he’s doodling and off in other worlds.

Matthew Jarvis:   Yeah, text messaging. Updating my Facebook profile. Well, today we want to talk about probably one of the topics we get the most questions on, which are retirement. What I like to call the retirement income guardrails, what Micah calls the income buckets, very similar philosophies, just different ways of articulating it. We want to talk about it, especially in light of the current bear market and how Mike and I are talking to clients, how the strategy works in good times, which we’ve had for the last 10 years, but especially and most importantly how it works in bad times.

Micah Shilanski:  We’re going to give some talking points as we go through this. What are some warning signs when you’re talking to clients or prospects that aren’t good signs of clients? I know one of the things I look at is if they don’t get the income buckets idea, if they don’t like that concept, if they want to take more risk, if they want everything in the markets, all of those things are great warning signs. They’re not going to be ideal clients and we walk away from that relationship. I love the bucket scenarios. Guard rails, whatever word you’re going to use, six one, half dozen of the other, in my opinion. I love it because not only does it frame how things work in bad markets, it forces us not to be greedy.

Micah Shilanski:  Because we’re doing things on a consistent basis. I got to say, right now, and it’s nothing that we’ve done, but with our clients we look like heroes with this market condition because in November, December, and January we were raising cash across the board. It had nothing to do that we knew a worldwide pandemic was coming or the markets were going to crash. Jarvis, I know you guys did the same thing. Markets were up last year, rules say take some profits, fill in these income buckets and it just works. I love talking about these things. I think there’s so much value for clients.

Matthew Jarvis:   Really are, and those rules are so liberating. Really, so much of what goes on inside of a perfect RA practice is living by, I hate to say living by the rules because we’re so much about thinking outside of the box, but it’s about being intentional about the rules that you’re setting and living within those rules.

Matthew Jarvis:   We talk about how to manage your email, how to manage your time, how to do appointment surges. Those are all rules that eliminate so many decisions. Back on the guardrails or income buckets, we’ll just call it cashflow. Right now I have clients saying, “Hey Matthew, can we invest some of our war chest? Can we take that cash bucket and invest it?” I say, “Sure we can as long as we keep five years of income set aside.” It was interesting, the first time a client asked me that, I was tempted to say, “Yeah, actually maybe we should shave that down to three years or two years and double down on this thing.” But I thought, Oh Nope. The rule is five years in the cash bucket, five years in the war chest. That is a non negotiable rule. Sorry, we’re already fully invested.

Micah Shilanski:  No, I think those are great rules absolutely to have. When it comes to rebalancing as well. We talked about this I know when we had our backstage pass one, but even if the markets are down and someone wants to rebalance, and I’m going to call it reallocate, because in my world, rebalance is the entire portfolio, so I just say reallocate if just their investment side. That five years, as you said, non-negotiable. In my mind, because when people tells me I can’t do something, I get really irritated and I want to do it anyways. It’s not a rule, it’s a process, because I follow processes.

Matthew Jarvis:   I like that.

Micah Shilanski:  Yeah. A little head game for me is these are our processes and they work and that’s the thing about them. You’ve got to follow the process that works. You got to have it like a religion. You got to do it every single time because then when you don’t is when you’re not only going to hurt yourself, you’re going to hurt your clients.

Matthew Jarvis:   This is not the topic of our podcast, but I want to pull out that little bit of—that’s not the right word—empowering thought there. Micah, just say, I don’t like things to be called rules, that grates me the wrong way. Perfect. We could dismiss that as well. That’s trivial. Micah, deal with it. These are rules. No, the rules is a made up word anyway. That applies to so much of the perfect RA. If you say, “Well, I really want to check my email three times a day instead of once a day, or that’s too much, but go ahead. Go ahead.” That’s not the deal breaker. The deal breaker is you check it a hundred times a day. The deal breaker is that every time a client calls, you’re trying to decide what rent investments you’re going to recommend. Every time the market moves, you’re not sure what that means.

Micah Shilanski:  Just the decisions of how we’re making decisions with the perfect RAA. How we’re making decisions with clients is all the same thing. When I’m talking with clients, make a decision and say, “Great, what’s our end goal?” Our end goal is retirement. Our end goal is to be able to spend X amount of money. These are our end goals. Great. Are you making decisions aligned with those goals? If you are, great. Everything’s good. If you’re not, then you have to make a change. Whether that’s a process in income buckets, whether that’s a perfect RA mindset. Jarvis, I think that’s a great read on that.

Matthew Jarvis:   Really is. Another process that comes out of this that I think is really beneficial, I know for me is this bucket approach or guardrails approach takes away almost all discussion around risk tolerance. There’s so much talk in our industry about what’s your risk score, and should you be 43% in equities or 82m and what about your age minus a hundred, and all of this crap about risk tolerance. My risk tolerance discussion, and Micah, I’d love to hear yours.

Matthew Jarvis:   Mine is, how many years do you want the war chest? How many years do you want to know that we can survive a bare market? Is that four? Is it five? Is it seven? Is it ten? That then determines our risk tolerance because then everything comes back to, Mike, if you’re my client and say, “Hey Mike, I know the market’s way down. We still have four and a half years of war chest. Do you think we can make this through it in four and a half years?” You say, yes, I do, or no, I don’t, but that isn’t in determining our entire risk management discussion.

Micah Shilanski:  I absolutely love that, because as we talked about before, I think those risk profile questionnaires are a bunch of crap. I actually use this when I’m talking with prospects or I’m talking out there in prospecting side as a differentiator that’s going to be out there, because when we’re talking about risk management, I say, “You know what? One of the greatest disservices financial professionals, people like me have done to our community is we’ve made you an emotional investor. We tell you all the time, don’t be emotional about your investments. Think about this in the longterm. Think about all this.”

Micah Shilanski:  Then what do we do? We hand you a questionnaire. It says, “Hey, if your portfolio went down by half, what would you do?” We’re training you to be an emotional investor. Why would you do that? Why would you fill out a questionnaire that asked this when you know you’re not supposed to be an emotional in your investments?

Micah Shilanski:  Not only do I at my core, and I know, Jarvis, you do too, where we firmly believe this. That is a stupid idea. Now from a marketing perspective as well, we’ve now separated ourselves out from so many of the competition and now if they’re going to go talk to somebody else that gives them that emotional questionnaire, they’re going to be like, why am I filling out emotional questionnaire? Right?

Matthew Jarvis:   Totally, totally. This is where everything ties together, right?

Micah Shilanski:  Mm-hmm (affirmative).

Matthew Jarvis:   Income is not isolated from market, is not isolated from delivering massive value, and just think about yourself as a consumer. I recently went to a new doctor and I had to spend 10 minutes filling out questionnaires about what was my great grandfather’s third cousin’s health conditions. I don’t enjoy doing that. I don’t know if it hurts half the time or three quarters time. I just want to talk to somebody like a human and say, “Hey, my shoulder hurts when I do this. What do I do to fix it?”

Micah Shilanski:  Yeah. No Jarvis, now personally I think you should do, I don’t fill out any of those forms whatsoever. I will not fill them out. All but one time I’ve been able to get in to get services done. There’s one time where we spent 30 minutes and then finally I was like, “Damn it. This is not a good use of my time.” It was a one page form to fill out, but I think you just reject all those forms in general and just see what happens.

Matthew Jarvis:   I’ll become an anti-former, it’ll be great.

Micah Shilanski:  Anti-former. As that helps you for your clients, maybe we should get back on topic.

Matthew Jarvis:   Yeah, let’s get back. Let’s talk about some of these processes. We talked about the income bucket, or what I like to call the war chest. That has, Mike, I know for you, but for me as well, every single discussion I’ve had with clients these last two weeks, and we’re recording this in the midst of the coronavirus panic, everyone has started with, “Mr. and mrs. Client, guess how much money is in your war chest?” “I don’t know, Matthew, probably maybe like $10,000.” “Great news. $700,000 enough to take us through five years. Do you think this will be straightened out in five years?” “Yeah, Matthew. I think it will have to be straightened out or we’ll all be dead.” “I think the same thing.” “Well Matthew, that’s really all we need to talk about today.” “Okay. I’ve got more to say, but if you’re good, I’m good.”

Micah Shilanski:  That’s it. We were chatting a little bit earlier about how shortened our conversations have been because clients don’t want to know right now what their account balances are. I’m not saying withhold this information for them. However, in our newsletter, backstage pass members, we will give you a copy that we just sent out. Does tell clients not to open their statements for what they get in April, probably May and June as well. Let’s give it a little bit for recovery.

Micah Shilanski:  We’re not saying that to be too cheeky with them, but we’re saying, look, if you’re going to make an emotional, panicky decision based on this number, don’t because, oh, by the way, you have this war chest. Oh, by the way, we have this buckets of money that is going to be there, and we’re leading off all of our conversations a little bit different. Ours are a little bit different what you’re saying. Basically, I say, “Remember mr. And mrs. Client, we invest your money in three ways. We have our cash, our income, and then our growth bucket.”

Micah Shilanski:  The growth bucket’s what’s down, but let’s look at our cash and our income buckets and oh, we have X amount of years in that bucket. Then I go to your same thing about what it is, because I like framing it in that way so they can separate out market volatility from cashflow. Because that’s the big question is that monthly cashflow.

Matthew Jarvis:   Totally is. That framing is so critical. For example, I see advisors all the time that talk about fixed income, that talk about muni bonds, that talk about treasuries. None of that makes any sense to clients. Anytime those words come up, if it says fixed income, somebody say your war chest, or Micah, you say the cash bucket or the income bucket. I never talk about, hey, we’re 37%. One, I would never use percent with clients. We’re not 37% of the fixed income. I say, “Hey, we have five years of cashflow. Micah, to your point, five years of cashflow essentially totally protected from the markets.”

Micah Shilanski:  Now Jarvis, do you put that in … I’d love to ask you a couple of questions, then I would love to get in to a little role playing on actually how you deliver this with a client. Is it going to be all right?

Matthew Jarvis:   Please. I’d love to.

Micah Shilanski:  Okay. When you say you would never give a percentage, so let’s just use $1 million because it makes my math easy. A client has $1 million, they’re 37% inside of cash income, whatever your war chest it’s going to be there. You say you have X amount of years, do you also tell them the dollar amount, or do you just focus on years?

Matthew Jarvis:   I lead with years and then I tell them the dollar amount. I’d say, “Hey, we’ve got five years, it’s about $370,000 of cash and bonds in that war chest, almost entirely insulated from the markets.”

Micah Shilanski:  Right now we’ve got a lot of market volatility, and forgive me, ours are not your guard rails. Help me understand this, there’s a guard rail section that says if your accounts are markets dropped by X percent, then they have to take a 10% reduction in cashflow. Is that right?

Matthew Jarvis:   Correct. Yeah. The guardrails illustration, and for backstage pass members, there’s a video on the backstage pass of me explaining it to a client drawing on the whole thing. Our million dollar client, they’re going to be able to take $54,000 a year of income. Then they’re going to have a lower guardrail at about 800,000, so a 20% reduction. Again, to the client, that’s all in dollars. Then we’d say, “Hey, your 54,000 is going to now become 49,000 a year until the markets recover.”

Micah Shilanski:  Okay. Now, this is going back to conversations that you’ve already had with clients. This isn’t a brand new information to client, right?

Matthew Jarvis:   Yep.

Micah Shilanski:  Every quarter you’re chatting with clients and being like, “Hey, I’m going to use round numbers. You’re getting $5,000 a month from this. However, if the markets went down, if we went into a prolonged bear market or recession, you’re now going to have to go down to $4,500 a month immediately.”

Matthew Jarvis:   Totally, and I explain it, I say when. I would say, when, not if the markets go down, your income’s going to reduce, in this case by about $500. I make this a little gesture that you can’t really see in this video, and I say, “We’re just have to tighten our belts a little bit. Probably going to, maybe skip a trip that summer, and then when the markets come back up, your income comes back up.” Because I want to always translate it in terms that they understand. Immediately, they might say, “Well, $500 a month, where am I going to make that up?” “Well, maybe we’ll just skip vacations that year until the markets get better. Is that okay with you?”

Matthew Jarvis:   I’m always asking, is that okay with you? Because if they say, “Actually Matthew, it’s not.” In fact, I did have a client, Micah, he said, “Non-negotiable, I want my income to never change. I want my monthly amount to always be the same.” I said, “Perfect, we can do that. It’s a lower amount, but we can do that.” But I wanted to get that out of him during the good times, not when the market goes down.

Micah Shilanski:  Yeah. That’s exactly what you want to do is you want to focus on this. These are repetitive conversations we have to have with clients to let them know what that cashflow is going to be like if it’s ever going to change what happens. Now, this also works on the other side because I know you do the same thing. If you’re going to delay social security for our client, then you’re going to set aside a pot of money to draw from while you’re delaying social security. That means potentially their investments are going to go down for several years because of, I’m going to call it excess distributions, because we’re earmarking money.

Micah Shilanski:  That’s also a conversation that I really want to have. I want to show clients, hey, you had $1 million, two years into retirement, it’s going to go down to $800,000 because we’re choosing to delay social security. We not only want to talk about this in the sense that when the markets go down, but any big expense that’s going to drop their portfolio value, I want to be leading that conversation with them and getting them emotionally ready for that.

Matthew Jarvis:   Totally. I always call that a bridge, and I know Mike, I know you do the same thing. Anytime I’m going to over distribute from a portfolio, that money’s going to go into a separate account. Mike, and I know you do this all the time, but so if Fidelity would just open another account because it doesn’t cost them, I say, “Hey, this is our bridge account, this is our whatever we’re going to call this. This account’s going to go to zero and that’s totally fine. That’s what we want it to do.” I’m going to tell them that every single time. Otherwise, the conversation is going to be, “Matthew, look at all this money I lost.” You didn’t lose it. You took it out.

Micah Shilanski:  But they don’t see that. They just went through 30 or 40 years of growing money in assets where in their mind, except for in 2008, they never went down in value. Because they were always making a contribution, their accounts always went up except for 2008-

Matthew Jarvis:   They never paid a fee.

Micah Shilanski:  They never paid a fee, and now when they’re retired, their account value is going down. It can freak them out. You really got to lead this conversation in good times and in bad. Let’s chat about that a little bit, Jarvis, you’re okay. Let’s pivot it. I guess right now, are your guard rails going to trigger? I guess that’s one question I have for you.

Matthew Jarvis:   Yeah. Most of our clients have hit the lower guardrail and in our process, again, we’ve, we thought about this a lot ahead of time. You don’t ever want to be caught … there’s this expression being caught with your pants down. I don’t really like that expression, but we’ve thought about this all before the market went down. We had already decided our process was a client has to stay below the guard rail for three months before we’re going to make an adjustment, because spikes, extreme volatility like we’re seeing right now could cause that trigger.

Matthew Jarvis:   There’s a lot of white paper research that backs this up. Guyton wrote a lot about this. Kitsis has written about it. Technically, for the model to work, you could wait a year. That seems too long to me. We’re telling clients, “Hey, if we’re still below the lower guardrail by the end of June, right at the end of the next quarter, here’s what your income will be.”

Micah Shilanski:  I really like that. You’re trying to level their income. Now, are you reaching out to your clients now? You’re saying, so if I understood that correctly, by next quarter, so this is by June, so if the market stay down by June, then they’re going to have to take a 10% reduction in income.

Matthew Jarvis:   That’s correct. Yep. Yep.

Micah Shilanski:  Now, are you emailing your clients and telling them you’re sending them a VHS cassette?

Matthew Jarvis:   You know I like old school. I’m etching it on stone tablets. I’m sending it out. We’re talking to clients. So far we’ve been in middle of surge like you. I’ve been talking to clients about that during surge. I will, starting next week when my surge is over, reach out to any clients in person that I haven’t heard from them. Whether or not they’re below the guardrails, because we need to touch basis.

Micah Shilanski:  Yeah. This is a great time as well, and I know you’re going to do this. This is not just a time to talk about saying, “Hey, by the way, your income’s going to be cut.” You’re also going to pivot it with a value add. I would imagine, because we just got this huge value add as of yesterday when we’re recording this, the Stimulus Bill, the Cares Act. Apparently, they don’t care about debts and deficits, but whatever.

Matthew Jarvis:   What are we caring about here?

Micah Shilanski:  What are we caring about? But there’s a lot of goodies inside of there that we’re going to go through for backstage pass members on how to deliver value adds. I was actually geeking out reading it in between appointments, I was texting our mastermind group. I was like, “Oh, look at this. Oh look at this.” I was like, “There’s so many good things.” When will you go to them and you say, “Hey, your income’s going to be cut.” I would imagine you’re also going to have a pivoting conversations that are leaving it on an end note that says, “Yes, but these are some other things that we’re going to be able to take advantage of in the downmarket.” Or is that not correct?

Matthew Jarvis:   No, no. Always, always deliver massive value. Now, Mike, if you don’t mind, I want to pivot back to your bucket approach processes. Let’s go back to an average market, so not in the bottom, but an average market. Client calls, they say, “Hey Mike, I see that there’s $200,000 of cash in my cash bucket. I want to go ahead and pull that money out because I want to buy an RV and travel the country.” Or whatever the scenario is. How does that fit within the bucket’s process? They see cash, 200,000, they want to take it out and they’re taking income. Does that scenario happen? And if so, how do you handle it?

Micah Shilanski:  It doesn’t happen too often where I get those random calls, because we’re always talking about cashflow and our meetings and I’m always bracing my clients that says, “Hey, I’m always trying to look out over the next five years. Do we need to take any money out?” I always tell them, I said, “When the market goes down again, it’s not an if, when the market goes down, I do not want to have to put you in a position to sell and take a loss because that market’s down. I want to make sure we have money in other buckets.”

Micah Shilanski:  We’re always talking cashflow. It rarely happens. Kids would be the big thing, I would say, that come up. It’s smaller dollar amounts, but let’s say it did. Let’s say something came up and they wanted to take that money out. Well, as you know, if we had $1 million and they took out 200 grand, well that’s going to affect their cash flow. We’re going to have a discussion about saying, “All right, if we take this money out, how were we going to reduce monthly cashflow?” Because those two things are correlated.

Micah Shilanski:  They’re not always correlated in a client’s mind, so we need to connect those. We’re going to have a conversation about that. How does it affect what happens, et cetera. If a client came to me now, I would really be encouraging them not to do it. I would potentially be resigning from the account, firing them if they did it, because I don’t want to jeopardize their cash buckets and definitely don’t want to take anything out of the market.

Matthew Jarvis:   Yeah, doing it right now would be a potentially catastrophic risk to the client. As we’ve talked about before on the pod, Perfect RA, we never kept in a sinking ship. If a client’s going to take a catastrophic risk, we can’t be part of that.

Micah Shilanski:  Yeah. What about you? Do you do anything different when a client wants to take out a large lump sum? Let’s say in a good market or whatever it’s going to be?

Matthew Jarvis:   One of the things I love about the guardrail, and I guess I just got a quick caveat here. I love the guard rail because it works for me. Just like processes versus rules works for Micah, guardrails work for me. They work in my mind, but I just look at clients as, “Hey, I want to pull out X amount of money. Great news. Let’s pull out the guard rail, because I always have it handy. Oh, that’s going to keep you within that buffer. We’re still above the lower guardrail. Perfect. Go ahead and take the money. Just be warned that we’ve used up a lot of that buffer. Won’t take much of a market downturn for that to have to be reset.”

Matthew Jarvis:   If they’re going to blow through the lower guardrail for whatever reason, we just say, “Great, we’re just going to recalculate based on your new balance.” They, “Hey, you went from a million down to 800, so we’re going to go from 54,000 a year down to, I don’t know what that number is, 49,000 or something.” We’ll just recalculate. It’s no problem at all.

Micah Shilanski:  You know what I really love about this too, when you’re going to explaining it? Look, Jarvis isn’t saying he’s not telling the client no. He’s looking at a piece of paper which he made up. Just to be clear. Which you made up. You could even laminate it to make it, quote, official, but you could have this piece of paper that’s there and you are not the bad guy telling the client no. You’re saying, “Look, based on this, you can only have X. That’s going to be there.” It’s great because it doesn’t put you in an adversarial relationship with your client about telling them they can’t have any money. It’s, “Hey, what are the rules?” You’re going to follow those rules, and we know what those consequences are going to be. It’s just a great setup.

Matthew Jarvis:   Yeah. I haven’t become their spouse, or their parents saying, “Hey, you can’t spend that money.” I do want to contrast that with Monte Carlo simulations, and I know that this is the sacred cow of our industry. Before I had figured out guard rails, we’d run the numbers through the Monte Carlo and it’d say, “Oh, well, you’ll go from an 83% probability of success to a 79% probability of success.” The client would say, “What the hell does that mean?” I would say, “Well, 83%, does that meet my needs? I don’t know.” They’d say, “Why can’t we do 100%, or can we take this down to 50%?” I’m a gambling person. It didn’t leave me with clear answers.

Matthew Jarvis:   Guardrails, I always have a clear answer. You’re inside the guardrails or you’re not. Here’s the distribution rate. Here’s what we do when the market’s down. Here’s how big the war chest is. Next.

Micah Shilanski:  We could blame this on you. We could say, “Well, it’s just your inability to explain the Monte Carlo analysis to the client.” Okay, fine, let’s go with that. So what? You need a system that works for you that you can engage with your clients. That wasn’t it. We’re moving to this. Guard rails work. Next.

Matthew Jarvis:   That’s right. That’s right. You mentioned earlier about all of the value adds. You and I are so excited about all the value adds that are coming out of this Cares Act, we’re giddy like little children. I would rather spend my time studying the Cares Act and finding the massive strategies that are there, then nuancing and running Monte Carlo simulations on 82% versus 81%. That’s not delivering massive value.

Micah Shilanski:  I was talking to a couple clients as the Cares Act was passed, I was reading it in the morning, then I had a call with them. I started geeking out. I said, “I’m sorry, I’m totally geeking out about all these tax savings.” They start laughing at me. They’re like, “My God, I am glad there are people like you that want to do this.” But it’s one of those things, share that excitement with your clients, especially in the time that the markets are down, being like, “Hey look, we’re going to take advantage of this. We’re going to figure these things out to make sure you’re taken care of.” That’s a huge value add regardless of market conditions, and especially in the downmarket.

Matthew Jarvis:   Yeah, and we’re going to do for our backstage pass members, we’re going to do a whole a 100K challenge on that. It’s funny because Mike and I have this whole itinerary of a 100K challenges, marketing and prospecting and the prospect process, and they keep getting bumped because we’re like, “A new value add, a new value add. We have to cover this.” But yeah, the stuff that’s coming out for clients out of this Cares Act, wow. You’re not only going to demonstrate your value. These strategies will pay for your fee for years to come. Years to come out of just the strategies from this one act. Nevermind that you save the client from falling off the ledge, nevermind that you save them from selling in a bad market. Just these tax strategies alone pay for your fees for years.

Micah Shilanski:  Yeah. In fact, I have a webinar coming up in April 23rd and we’re going to do a public webinar that’s going to be not for … This is for federal employees and we’re actually pivoting this whole thing to talk about market volatility and the Cares Act, just because there is going to be such value adds inside of this. These are great prospecting opportunities.

Matthew Jarvis:   I love it.

Micah Shilanski:  Let’s jump back to the guard rails real quick, Jarvis, because I know, and I know we might be running it a little bit long, but what’s the math behind this? Because you do a pretty good distribution rate. You do a 5.4% distribution rate for your clients. Plus you have your fee that you’re putting on top of that. It’s not 5.4% minus your, let’s just say a 2% fee.

Matthew Jarvis:   Working up there. I’m working up there.

Micah Shilanski:  5.4% plus your fee, so you’re taking out a pretty substantial, let’s just call it a 7% distribution, from these accounts every single year. How are your clients not running out of money?

Matthew Jarvis:   Yeah. Yes, so the 5.4%, that number comes from Guyton. There was a couple of white papers that Guyton wrote for the FPA journal. If you’re not familiar, it’s G-U-Y-T-O-N, and if you go on Kitsis’ site or go on the FPA site, just Google his name, you’ll find a lot of information and Guyton’s done some really brilliant work on this. He looked back actually, and I tell this to clients, “Hey, the worst time to retire in American history was when?” They all say right before the great depression. I say, “Oh, that’s actually not correct. 1973 right before the 73, 74 bear market and all the inflation that followed.”

Matthew Jarvis:   Guyton looked at models that would work, and I’m geeking out a little bit here during that, he actually came up with a 6.2% distribution rate. That felt high, plus that didn’t account for fees, so we backed us down to 5.4. The key is that it’s a dynamic rate. We can do that high of a rate because it’s dynamic. Now, I mentioned this in our last webinar and I’ll mention it again. There is no income strategy that is guaranteed. There is not. Even a SPIA if you’re buying SPIA’s, where’s your inflation protection?

Micah Shilanski:  I was going to say, what do you mean? There’s insurance companies all day long to tell me they have guaranteed income plans to get all your money in three different annuities and you’re good.

Matthew Jarvis:   Yeah. Yeah. If you know how long you’re going to die and what interest rates inflation in the markets are going to do between now and then, you’re good I guess. There is no guarantee strategy. You’ve got to pick the one that you can look at client in the eye and say, “This is the most effective strategy for what’s going on.” By the way, that’s the same with medicine. In case you haven’t noticed, doctors are not all knowing. There’s stuff, as we see with the coronavirus, they’re saying, “Based on what we understand right now, this is the best course of action. Let’s go with it.”

Micah Shilanski:  Yeah, I think that makes a ton of sense. Biggest thing inside of here that I’m going to say your biggest takeaway is you must go out in front of clients, you must have an income plan for your clients, and it must be consistent. I don’t want 72 different income plans going on for clients. Yes, their dollar amounts are going to be different, but you have to have the same methodology across the board.

Micah Shilanski:  Because when you have an effective process, regardless of what it is, what we’re talking, prospecting, marketing dictation, income buckets, when you have an effective process, you deliver more value to all of your clients. Really, really important. Jarvis, let’s take that and transition into some homework items. Because a smart guess it’s all about action items.

Matthew Jarvis:   It is about taking action. Well, I would say this is a bit shameless. Action item number one market calendar, April 7th, 1:00 PM Pacific, we have a backstage pass, a 100K challenge that you’re going to attend live if you’re a backstage pass member. Closing Every Qualified Prospect is the topic of that. Unless we switch over to the Cares Act

Micah Shilanski:  We’ll probably do prospecting. We’d be kicking this one off.

Matthew Jarvis:   Yeah.

Micah Shilanski:  Yes, absolutely it’s going to be that one. Number two is if you don’t have a clearly defined income strategy, you need to go out and do one, or review it with all of your clients. Have a strategy, review it with all of your clients, how are things going to work? You need to stick to it. I was talking with a bunch of advisors in this crisis and it was amazing how many of them moved all of their client’s money into cash. I was dumbfounded, quite frankly.

Matthew Jarvis:   With no strategy to get back in by the way. That wasn’t like they were momentum trader and that was a trigger hit.

Micah Shilanski:  If you are, then we can argue that one later, fine, but stick to your guns. You have to have a plan with your clients and if you are emotionally reacting to this stuff, because if you’re emotionally reacting, it means you didn’t have a plan. That’s what this means. You need to have a plan, you need to understand how it works, so that’s going to be your second action item.

Matthew Jarvis:   I would say action item number three is to record yourself presenting this to clients. Now, we have some privacy issues doing it with a real client, so just record it presenting it to your assistant, to your spouse, to your kids.

Micah Shilanski:  I wouldn’t do your spouse, but sure.

Matthew Jarvis:   I guess I’ve never presented to Jackie, but I’ve done it to my team. Record yourself doing that and then look, all right, how can I make this more impactful? How can I give a better presentation? I love standup comedy just as a quick side and I’ve done standup comedy, all good standup comics record all of their material, and then go back and watch it and they say … and stand up comics, they nuance it down, they say, “What was my tempo? What was the words that I use? Where was the emphasis in my syllables?”

Matthew Jarvis:   Seinfeld talks about this all the time, but record it. Watch yourself. How do I make this more persuasive? Where am I making this hard for the client to understand?

Micah Shilanski:  It’s a presentation, right?

Matthew Jarvis:   Yes.

Micah Shilanski:  Which also means it’s a performance. This is a performance with every single client that you have coming in. I don’t care if you’ve done it already a hundred times. It’s the first time for them that’s going to be there and you must give it your all.

Micah Shilanski:  You must be confident. You must understand what you’re doing, and you have to deliver that performance, otherwise, you are not delivering value to your clients.

Matthew Jarvis:   Totally.

Micah Shilanski:  Well, I’m going to say one more action item. It’s a bunch. It’s going to be on there and this goes for everyone across the board. One of the things that we’d love the nation’s help with is on Kitsis’ website. He always asks for articles for especially things for weekend readings. Why don’t you go ahead and throw in his comments? He should be following the perfect RIA. We have articles we’re posting that are going to be out with these podcasts that are going to be there.

Micah Shilanski:  We’d love it if you would comment inside of there and if you want to take that comment and kick it over in social media and tag us, you will get some pretty awesome swag.

Matthew Jarvis:   Yeah, and go ahead when you tag us on social media, tell us what swag you want. Now, TPR branded Teslas. That’s from Micah and I only, but if you’ve got some ideas, we’d love to hear those. Micah, always a pleasure talking with you about this stuff. Really excited to be delivering massive value to our nation and to our clients.

Micah Shilanski:  Yeah. Jarvis, it’s great. I’m looking forward to we dive in into the Cares Act. Until next time, happy planning.

Matthew Jarvis:   Happy planning.

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