New Advisor App Optimizes Portfolios For Income In Retirement

Sunday, January 09, 2011 20:58
New Advisor App Optimizes Portfolios For Income In Retirement

Optimizing a household’s retirement portfolio for income distributions is more important than ever, with the first baby boomers, people born between 1946 and 1964, turning 65 on New Year’s Day. Here’s a look at an app for advisors that automatically optimizes retirement portfolios for income distributions.

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LifeYield is a new kind of app for advisors.
LifeYield has a patent pending on an app that helps advisors minimize income taxes on interest, dividend income and capital gains, buying and selling assets in the most appropriate type of account and implementing a tax-optimal withdrawal policy. LifeYield manages asset allocation at the household level by locating assets in the most appropriate type of account.
The people behind LifeYield are smart and seasoned.
LifeYield is based on an algorithm developed by chief investment officer and co-founder Paul R. Samuelson (son of the Nobel Prize winner, Paul A. Samuelson). LifeYield is the second company Samuelson started with Mark Hoffman, the chairman and CEO. Their previous adisor tech venture, Upstream Technologies, was bought by CheckFree in May 2007.
Jack Sharry, who handles marketing and sales, has over 30 years of Wall Street experience, including stints as chief marketing officer at The Phoenix Companies; head of broker-dealer sales, retail marketing, and product development at Putnam Investments; and national sales manager for insurance and annuities at Morgan Stanley.  

Sharry says other rebalancing systems don’t focus on optimizing income portfolios the way LifeYield does and require a lot more work to get running and manage.
The LifeYield app currently is targeted to enterprises and has interfaces that feed portfolio data from Albridge Solutions, National Financial, and Pershing.
Cambridge Investment Research, the first big independent BD to work with LifeYield, has identified 50 advisors that will try its system. The list price is $3,000 a year per advisor, but BDs get deep discounts.
LifeYield focuses on optimizing retirement income portfolios across an entire household. Rebalancing systems, to the best of my knowledge, focus on neither retirement income nor consolidation of account data across an entire household.
My impression is that other systems require advisors to create rules for each individual client to govern their tax-efficiency. They are a lot more complex to set up and maintain than the automated rules engine of LifeYield.   
Please post a comment if you use a rebalancing app that is focused on consolidating assets and optimizing retirement income across an entire household. Also, let us know how labor intensive it is. Does it require individual adjustment of rules for each client? Or can you establish rules across all clients without tinkering each client's rules indiividually? The latter requires an algorithm, which I believe differentiates LifeYield from any other professional portfolio rebalancing tools.
LifeYield engaged Ernst & Young to validate its algorithm. “Ernst & Young conducted independent tests on four different sized households to quantify the potential benefits of the “LifeYield ROI” tax-smart methodology in accumulating assets and then selling those assets to produce income in retirement,” according to a research paper on the E&Y findings.
E&Y compared the LifeYield methodology to a “Pro Rata approach” that “reflects a common self-directed investment management approach different advisors – and, in multiple taxable and tax-advantaged accounts – all of which adds to the complexity.”
E&Y evaluated how each of the four households would have performed from 1969 through 2008, including a 15-year pre-retirement accumulation phase and a 25-year retirement period. In each case, LifeYield’s methodology “would have provided significantly more returns and income and would have accrued far fewer taxes than that of the Pro Rata process.”
A back-tested investment methodology is obviously of limited value. Such studies need to be viewed with some skepticism. But the effort to get a third party like E&Y to validate the LifeYield system demonstrates a commitment to intellectual rigor and the findings are indeed impressive.
The results of E&Y tests indicate that using the LifeYield methodology (instead of the Pro Rata method):
  • can increase income in retirement by up to 33% and remaining assets to pass on as a bequest by up to 45%.
  • when converting traditional IRA accounts to a Roth IRA, can increase income in retirement by up to 36% and remaining assets to pass on as a bequest by up to 47%.
  • can increase assets at retirement for a ultra-high-net-worth household where the retirement income is constrained by up to 20% and remaining assets to pass on as a bequest by up to 139%.
  • from 1969 through 2008 would have generated up to 44% more retirement income and 39% less in taxes.
Two trends are worth noting.
First, broker-dealers and registered reps are getting this app before RIAs. I’ve predicted that RIAs, who have always been technology leaders among independent advisors, are in danger of falling behind registered reps. LifeYield could be the first signifcant example of this actually happening. While BDs have the buying power to get discounts on enterprise-wide systems, RIAs don’t have that luxury.
The second trend to note is that LifeYield represents a movement toward more specialized apps targeted to advisors. The Web empowers small tech vendors to build add-on products, overlays that work with other systems and make them better. LifeYield does not replace a financial planning app or a portfolio management system. It’s an overlay to other systems used by advisors.  
Application programming interfaces, which allow one program to pull or push data from or to another program, are driving this trend and it will influence advisor technology enormously in the years ahead by empowering advisors to stitch together best of breed apps that are very specialized, that do one thing great.
Let me know what you think. 


Comments (2)

Interesting. Many years ago I saw a paper in the Journal of Financial Engineering about optimizing after-tax returns. As I recall, the math employed was dynamic programming (which is also the math that ESPlanner uses). Is that what LifeYield is using? How much of LifeYield's potential benefit could be captured by a small set of easy-to-implement rules? How many dimensions of uncertainty does LifeYield consider; e.g., investment return, tax rates, mortality, unexpected liquidity needs?
GlennDaily , January 12, 2011
LifeYield uses a dynamic optimization process with an incremental trade algorithm that considers location, taxes, asset allocation, risk and trading costs across any number of registrations. We also employ an actuarial table and we can either take a specific withdrawal amount from a planning system or derive a sustainable average maximum using an annuity formula in our multi-period Illustrator. Apparently simple rules are not easy to implement manually across multiple securities in many accounts because they involve an enormous number of calculations and sorting of data. Even simple rules like avoiding short term gains involve many exceptions.
jsharry , January 12, 2011

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