Your Wealth Advisor - Canada

It is hardly a puzzle. It’s just confused poorly informed people naturally using their Reflexive brain (Amygdala & Thalamus) rather than their Reflective brain (the Prefrontal Cortex) to make financial decisions. It’s often called the greed factor or a Swing For The Fence mentality.

It's a natural human reflex and we should be ready counter this vulnerability. Thousands of years of behavioral conditioning have made us an easy target for conflicted industry participants who deliberately appeal to peoples Reflexive brain - and capitalize on it.

Consumers of financial services and products should look well past promotion and marketing materials with careful phrasing, cherry-picked graphics and mind numbing fine print. Due Diligence and critical thinking is essential. At minimum get an expert second opinion. 

On an ethical level I find it worrysime when an adviser simply ignores presenting another safe, suitable and appropriate low-cost, lower-risk (but low industry profit) alternative.. For a professional a sin of omission is unacceptable, ask your accountant or lawyer. In any fiduciary relationship not-sharing all of the relevant means the client is unable to make an informed decision. The reason for seeking advice in the first place.   

I don't see any "Annuity Puzzle!" What I see is millions of people with CPI Indexed Defined-Benefit Pension Plans who are not puzzled!

1. Illiquidity is not an issue or a big concern to people who have CPI Indexed pension annuities - Millions of happy and successful users of CPI indexed DB plans don't seem disadvantaged. They naturally get their liquidity elsewhere, a line of credit on their home perhaps.

2. Inflexibility. Inflexibility is not a big issue or a concern with have people who have CPI Indexed pension annuities - Millions of happy and successful users of CPI indexed DB plans don't seem at all unsatisfied with that trade-off. They clearly have the experience with that aspect and consider security and safety as more important. It is a non issue to real people.

4. Wealth transfer. It is also not an issue issue or a big issue or a concern with have people who have CPI Indexed pension annuities - Millions of happy and successful users of CPI indexed DB plans are very satisfied with that trade-off. They clearly have the experience with that aspect and consider alternatives. Like leaving the house and other assets.

The real Puzzle is the Systematic Withdrawal Plan or drawing income from a Traditional Market Portfolio of stocks and bonds. Why do so many people do it Wrong?

Of course that's not really a puzzle either. Combing a biological human reflex with a widespread campaign of misinformation and half-truths is a recipe for failure. 

Systematic Withdrawal Plans or SWP: There is a widespread and completely unfounded assumption that people know how to draw a sustainable inflation-indexed income safely from a market portfolio - they don't. The SWP approach is out because it won't be done properly. You can’t be positive users won't panic or become greedy and commit financial suicide in the process, or get scammed into buying some inappropriate product in unsuitable proportions.

Here is the test: Show me one individual that has drawn an inflation indexed life-long income over 30 or 35 years (in retirement) from a SWP. You can't, they don't exist yet - they may never exist!

This is an unproven experiment, there is no proof it will work for you and nobody who has actually done it. This is a risky and uncertain approach. Even Harry Markowitz didn't use his (now 60 year old) theoretical approach. Why would you?

Lastly and most importantly. Behaviour, tax treatment and friction costs will make or break any approach. Especially the SWP approach. Adviser's and their clients don't know how, cannot or chose not to execute a safe and efficient SWP.

Until proven otherwise the burden of proof falls to the market hypothesis, the Systematic Withdrawal Plan and it's proponents.

The successful track-record of Canadian insurance company Life Annuities and quality Defined Benefit Plans is demonstrated fact not theory.

Graham Cook