Like many, I spent some of my time in college working as a waiter.  During a training session at one of the restaurants, the manager explained how to respond when a diner asked "What do you recommend?" He was adamant that it was not proper to tell the customer what my favorite dish might be.

Instead, he insisted that I ask about the types of food that the customer likes or might be in the mood for at that time. I should then suggest two menu items similar to what was described. "Give them what they want" he said.  This increased the odds that they would enjoy their meal, leave a good tip (thus paying more), and come back another time to pay more again. This was a simple old school sales tactic. It worked, and everyone was happy. 

I started to think about how this principle might apply to working with financial planning clients. The starting point is what clients want. Among things I hear most frequently these days is they want assurances, certainty, stability, safety and confidence that they will get a good result. This may be a tall order these days, but there may be a way to deliver.

What if instead of presenting them with reports that show the value of their assets bouncing up and down like a yo-yo, we showed them a steadier path? We could simply report an increase at a steady rate, regardless of what the actual investments were worth. The rate couldn't be too high or it would not be believable and not too low because it would not be attractive. I'm thinking 5% would be good. 

Because the actual value of their assets won't increase steadily, we shouldn't call that the account value. We'd need to use a different term such as "program accumulation." We'll report the actual values too, but highlight the steady increase. We don't want the portfolio allocations to be too conservative or too aggressive. To combat the tendency of clients to want to vary their allocations based on short-term factors, we would probably need to restrict the range of the allocations, exposure to certain types of securities, and dictate the rebalancing procedures.

Market volatility also presents a risk that the client would want to access funds at a time when the actual portfolio value is lower than the program accumulation. To manage this risk, we would have to make adjustments to the program accumulation so things don't get too far out of whack and we would have to limit withdrawals to no more than the actual portfolio value. 

People want to know they will always be able to pay their bills. More and more, people seem aware of the so-called "4% rule" so a 5% income guarantee could be attractive. People often forget about inflation, so we could just keep the payments fixed, reducing risk.  We'll pay it until the funds are exhausted (20 years) or for life, whichever is longer. 

Naturally, guaranteeing a fixed-income stream could be quite risky if it is paid for a long time. This is one reason insurance companies are so highly regulated and are required to have substantial reserves. I'm not sure the typical financial planning firm should take on all that, so it seems to me the easiest way to guarantee income is to purchase an annuity for the client. 

Clients will not likely view a 5% payout on the actual portfolio value as very attractive if that value is below the program accumulation number that they've seen increase so steadily, even if the payments are guaranteed by an insurer.  Therefore, it is probably more appealing to base the payout on the  program accumulation instead.

The annuity would be obtained at a cost that we cannot determine today. That might sound scary, but we can deal with that risk as well. All we have to do is require that the income stream not start until a client attains an age that gives us some wiggle room on the pricing of the underlying annuity.  There are three main parts to this. 

First, the longer the time frame the better, so just as any withdrawal would require an adjustment based on market realities, triggering the income stream in less than, say, 10 years, would trigger an adjustment or maybe even invalidate the guarantee.

Second, we pick a good age for payments to begin. For example: 5% of $1 million is $50,000. Today, for a couple, both age 75, the cost of a 20-year-term-certain life annuity on both lives is only about $774,000. So as long as the actual portfolio value is no less than $774,000 when the program accumulation is $1 million, there will be plenty of cash to buy the annuity. To get to $1 million at 5% in 10 years, one must start with $614,000. Since we only need $774,000, the assets only need to actually earn about 2.3%. We'll pocket any excess over the underlying cost of the annuity. 

Lastly, many people believe that over the next decade, it is likely interest rates will be higher than they are today. If interest rates do rise, the cost of the annuity will actually decrease, giving us even more leeway.

There is still some risk to our firm, but these risks have been greatly reduced. Still, the portfolio may not make 2.3%, so the remaining risk warrants charging a higher rate than we normally would in managing a portfolio. 

Showing clients reports with steady increases despite what might be going on in the world and assuring them of an income stream later in life when they're most concerned about having such cash flow would be something that would resonate with a lot of people. We might attract more clients and make more money, while clients would get what they want. Sounds good to me. Except ...

There are significant problems with this plan.  Some readers may already be putting together a scathing letter to the editor centered around the ethical issues embedded in this approach. Among them is this "program accumulation" number that would be reported.  It simply has little meaning. Clients can never spend that amount.  They can spend the actual value (reality) but not the program accumulation amount (a manufactured perception).  An income stream based on this unreal number is just as much of an illusion. 

The various restrictions described and parameters I laid out minimize the risk to the firm.  Some of you think the remaining risks are negligible and therefore we shouldn't really be able to charge much more.  I agree but don't get mad at me.  I didn't create this arrangement.  The SEC might not like it if I implemented it but it does exist. The program I described is basically the same as many annuities with guaranteed withdrawal benefits.  Those are real deals not fantasies and they do indeed cost more.  If you want to write a letter, write Congress about how something so clearly problematic under a fiduciary standard is allowable under insurance and Finra rules. But I digress.

On a different level, the restaurant manager may have given advice that works for waiters, but it doesn't hold much water for a true professional advisor. Integrity goes beyond merely telling the truth. Integrity requires us to tell people what they need to hear even if it is not what they want to hear. 

We would all like to insulate our clients from complex financial and economic forces and we can protect them to a point. However, we also must face the reality that these forces exist and will always be present no matter what we do.  The restrictions placed on the portfolio I described requiring assets to be placed in a reasonable allocation, to remain in a reasonable allocation, to avoid overexposure to risky assets, to stick to a sound rebalancing protocol, to stay invested for an extended time all greatly reduce the risk.  Advisors can help clients apply the principles of diversification, patience and discipline themselves and reap similar benefits.  I believe we are better off helping clients understand how they can navigate the chaos rather than pretending that we can keep them from being affected by the uncertainties.

There is nothing necessarily bad about giving people what they want and making them happy. just don't let the effort prevent you from giving them what they need: the ability to deal with reality and uncertainty. 

Dan Moisand, CFP, has been featured as one of the America's top independent financial advisors by most leading financial advisor publications.  He has spoken to advisor groups on five continents on topics such as managing investments and navigating tax complexities for retirees, retirement readiness, and most topics relating to the development of the financial planning profession.  He practices in Melbourne, FL.  You can reach him at