One of the benefits of this job is finding new concepts in the financial advice world. It’s no secret that this emerging profession has attracted many bright minds.

Over a decade ago, I remember speaking with the late Peter Bernstein, who had been an advisor—the term then was investment counsel—since the early 1950s, when the profession was truly embryonic. I recall him saying that he concluded after a century that this business focused excessively on the asset side of clients’ financial lives while underestimating the liability side of the equation.

Two of the sharper people in this business—Russ Hill, CEO of Halbert Hargrove, and Sam Pittman, head of asset allocation at Russell Investments—apparently were thinking the same exact thing. They decided to take the asset-liability pension funding model and adapt it to the personal financial planning business.

In their Big Picture column on page 25, Hill and Pittman explain the logic behind the model. I urge you to read it. In an upcoming issue, they’ll explain the math behind it.

Basically, the model takes the present value of a client’s future income plus his or her investment assets and divides it by future expected spending, including both necessities and lifestyle outlays. Because it takes different spending liabilities into account, the model is more dynamic than other frameworks like Monte Carlo simulation or the 4.5% rule. Mid-course corrections are easy to address.

I’ve always been a fan of the 4.5% rule and not just because I consider Bill Bengen a friend and a brilliant person. Many of the best ideas are simple, even though it takes a very smart person to discover them.

Although I’m not a professional advisor like most of you, I’m often asked by baby boomers I know how to convert assets into income. After telling them to see a financial advisor, I tell them that one simple way to frame the issue is the 4.5% rule. At least it will give them an idea, and it’s usually a sobering experience.

But the “personal funded ratio” developed by Hill and Pittman allows advisors to take into account all sorts of factors in different people’s lives. If you find it as compelling as I did, you may want to attend our Inside Retirement conference in Dallas on May 11-12 where they will be discussing it.

Evan Simonoff
Email me at [email protected] with your opinion.