Five Insights to Add to Your Knowledge Base and Improve as a Financial Advisor

Posted By on Apr 5, 2013|0 comments

As financial advisors, we’re expected to know a lot about a lot. Couple that with the pressures of being “on your game” and then throw in the requirements to become a Certified Financial Planner and your head might be spinning. It’s overwhelming. But it’s also an opportunity to stand out from the rest. From investing to cash flow management, college funding to Social Security planning, the more we know, the better.

Rather than get jumbled up in the madness, here’s a rundown on a few topics to boost your knowledge—insights I garnered from a recent conversation with Joe Tomlinson. Joe’s unique experiences as an actuary, financial advisor and now as a researcher and journalist for the financial planning discipline always make the conversation interesting and informative. As an actuary, Joe oversaw the annuity business for a major life insurance company.  After taking early retirement, Joe moved to Maine and became a financial planner. As a sole practitioner, Joe then gravitated toward research and journalism, his passions.  Ultimately, he enjoys synthesizing the research and writing about best practices for financial advisors.  His work can be found on

During my conversation with Joe, we discussed five themes: stock market valuations, Social Security planning and strategies for the middle class, variable annuities, the overall investing environment, and savings rates.

Five Insights to Up Your Game

1.     Valuations and Success with CAPE

Joe has written extensively on predicting returns.  Ultimately, he has come to use Robert Shiller’s work for valuations that compares the average earnings over 10 years to the current stock price.  This differs from conventional method of comparing current price to the earnings expected in the next 12 months.  By comparing earnings in the last 10 years, the ups and downs resulting from the economy and business cycle are minimized.  The process is commonly referred to as the cyclically adjusted price earnings ratio, or CAPE.  Joe indicated that “While the Shiller P/E may be a good predictor of long-term stock market performance, it has never been touted as a predictor of market turns.”

Joe looked back through time, using his knowledge as an actuary, and determined that CAPE is an excellent predictor of subsequent 10-year stock market performance. A high CAPE (over 20) has invariably predicted poor stock market performance. Currently, the CAPE is at 22 times earnings. While CAPE accounts for less than 10% of the return in the first year, by the 10th year, it accounts for over 50% and continues to grow thereafter.

Consequently, Joe believes, “Financial planners are well advised to follow the cyclically adjusted price earnings ratio in making long-term asset allocation recommendations.”  However, he notes that a strict adherence to this strategy might lead to extreme positions that may be too uncomfortable for clients, like bailing out of stocks in the last half of the 1990s, well before the bursting of the dot-com bubble.

2.     Social Security Planning: The hole in financial planning for middle income individuals

While valuations can lead to significant changes in individuals’ wealth over time, Social Security is a larger portion of income for middle income individuals. Social Security is mathematically equivalent to purchasing an inflation-adjusted immediate annuity. “It turns out that delaying SocDelaying Social Security benefits could win in the end. ial Security is even more cost-effective than immediate annuities offered by insurance companies, an advantage that is even greater for couples than for single individuals,” Joe states.

Less than 3% of individuals actually delay taking Social Security, which may be an indication that as a society, we place a higher value on things we can have now. There are a few fledgling attempts to offer Social Security planning for the middle-income retirees including customized models developed by AARP and research from Bill Reichenstein and Bill Meyer.

Joe has written about a policy, Security Plus Annuities, which was introduced by Pamela Perun and her associates at the Initiative on Financial Security at the Aspen Institute in Washington, D.C. Security Plus Annuities is a proposed program for the Social Security office to offer inflation-adjusted immediate annuities to individuals at the time they sign up for Social Security.

While this might be a good solution, as financial advisors, we are well positioned to provide good planning to middle income retirees, such as delaying Social Security.  Or, we could facilitate the Security Plus Annuities program. The program could work with insurance companies to provide short-term immediate annuities or funding contracts that would transition into the delayed Social Security benefits.

Doing planning for the middle income market is different from high net worth segment and more challenging because people might lose money, and outlive their income. As a financial advisor, you could recommend a guaranteed lifetime annuity income beginning immediately, rather than encouraging clients to delay claiming and rely on savings for interim funding. (For more information on Social Security planning, check out our new ebook, The Essential Step-By-Step Guide to Providing Social Security Planning.)

3.     Variable Annuities For Reasons You Might Not Assume

Talking to Joe about variable annuities is like talking to Santa Claus about Christmas. Having worked at a large insurance company, he is well versed in all things about variable annuities.

Low-priced annuities could be a stronger play than higher-priced ones. As you might imagine, Joe is a believer in variable annuities, but not for the reason you may think.  He does not advocate the high-priced versions of these products that are the most popular, suggesting that individuals should instead look for lower-priced versions.

Joe believes that understanding annuity prices is the biggest advantage a financial advisor can offer clients.  For single-premium immediate annuities, Joe suggests advisors utilize, a site that provides shopping services for annuities from multiple carriers.

Joe especially likes the Vanguard annuities for their low cost fees. Vanguard now provides guaranteed withdrawal benefits.  He recommends comparing an annuity offering against the Vanguard offering.  This will help you understand the additional benefits and or additional costs.

4.     Investment Landscape a Mixed Bag

Our conversation then shifted from annuities to the overall investing climate.  Certainly Joe is concerned about valuations for both stocks and bonds.  Joe goes to several financial planning conferences each year.  At his last conference in Las Vegas, he noted a significant frustration with the low interest rate environment that Federal Reserve President Ben Bernanke has created. However, overall Joe is impressed with Bernanke and how he navigated through the recession.

While Joe recognizes that housing is improving, the housing market in Maine, where he resides, is sullen.  The supply of homes for sale in Maine far exceeds demand.  As a result, Joe is still concerned that consumer demand is weak into the future as middle-income wage earners have been stagnant for the last 30 years.  The inequality gap has risen.  “Where is demand going to come from to push the economy forward,” Joe wonders.

5.     Staggering Savings Rates

Overall, the move away from defined benefit plans like pension plans to defined contribution plans such as 401(k)s has hurt middle income individuals.  This is because individuals are forced to deal with overwhelmingly complex investment decisions and decisions about how much to withdraw from retirement savings.

Whether due to inexperience, uncertainty or “wanting it now” philosophy, savings are generally not adequate for retirees to guarantee a safe retirement. To have 90% surety of not outliving income, Joe believes individuals should save 15% of their income.  However, Joe believes the actual savings rate is only 9.5%, and that’s for the less than 50% of the working population that participate in employer-sponsored retirement plans.  With interest rates low and stock valuations high, many retiring individuals are at risk of running out of money. Overall, individuals have not saved enough in defined contribution plans to replace the security they once enjoyed in defined benefit plans.

My conversation with Joe came to an end, but his insights are lasting. I encourage you to review the five topics we discussed and tuck them into your knowledge base. The more you know, the better.


Follow Joe Tomlinson’s insights and regular writings on Advisor Perspectives (see below for links to his newest articles). His mission is to help financial planners and advisors do a better job.  He believes he can do this by making research more accessible to those advising individuals on their finances.

Recent Articles from Joe on

Choosing an Actively Managed Fund: What Works and What Doesn’t

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