In this interview with Retirement Income Industry Association (RIIA) Founding Chairman, Francois Gadenne, I explore a variety of issues including the status of present and future income-generation solutions, key questions for the industry that are being asked by RIIA, and changes occurring which may cause transformation and disruption within financial services. Readers should know that I am hardly a disinterested party when it comes to this not-for-profit association; I serve it as both a Board member and Chair of the organization’s Communications Committee.
Macchia: You were born and raised in France, and you’ve enjoyed great success since settling in the U.S. and becoming a U.S. Citizen. Talk about what brought you to this country, and share your experiences up until the time you began to work on the formation of RIIA.
Gadenne: I left France because I was a born entrepreneur and I was living in a culture that favors central planning and government control. My primary source of comparative advantage and specialization was not highly valued. Once I understood it clearly, in graduate business school in Paris, there was only one thing to do, I had to leave. From this point forward, the path was straightforward. I earned an MBA at the Kellogg School, and then became engaged in business strategy consulting at Braxton where I focused on the financial industry. I pursued my interested in Artificial Intelligence by joining a start-up involved in the development of expert systems for the financial industry. After that start-up failed, I joined the Artificial Intelligence Section of Arthur D. Little to lead a team building a weather forecasting system for NASA in the aftermath of the Challenger disaster.
Then I was hired by the Bank of Boston (BKB) to build expert systems. I grew-up on the IT side of the Bank to become a resident entrepreneur, managing increasingly complex and mission-critical projects including the launch the 1784 mutual funds family. I transitioned to the business side of the Bank when I joined The Private Bank. My mission was to develop and to run a technology-focused investment advisory business model for the core customers of the Private Bank.
At this point, in the early-90s, it became clear to me that such business models could be leveraged over became the Internet. This is when Ben Williams and I founded Rational Investors. Our mission was to provide mass-customized investment advice over the Internet in DC Plans. In 1999, we sold the company to Standard & Poors’. I became the general manager of S&P’s Retirement Services Division, we made the earn-out in two years and then I retired for 59 days. That’s when my wife, Lucie, told me across the kitchen table, “I married you for life, not for lunch. Go do another one.” That was the birth of Retirement Engineering.
At this point, both March 2000 and 9-11 where part of our history and consciousness. To start Retirement Engineering, Ben Williams and I interviewed about 100 former advisors, clients and prospects to ask the following question: “What is an important problem to solve in the retirement business?”
We heard many things and chose to retain two key ideas:
“Don’t do Process (like Rational Investors) do Products”.
“if you do Products, don’t do Inputs, do Outcomes”.
Retirement Engineering (REI) is a Research & Development Holding Company developing new forms of product packaging (Future-Income Denomination™, DBinDC®, etc.), new retirement income structures and products (GRInS®, LIncS™, MSI™, etc.) and new financial planning methodologies and benchmarks (IncomeAtRisk™, etc.). Our work is very low-key and under mutual non-disclosure agreements. We do not discuss our work nor do we talk about our clients. (Click here to see a high-level view of services offered by REI).
Along the way, an old friend and advisor, Professor Zvi Bodie of Boston University, offered me the opportunity to teach his class, so now I’m a lecturer at B.U. The nice thing about teaching is that it challenges you to see the limit of your thinking so that it can become more direct and more clear.
Macchia: Let me ask you about the formation of RIIA. I recall that it was only in February of 2006 when RIIA formally came into being.
Gadenne: The Retirement Income Industry Association (RIIA) emerged from persistent requests and comments made by REI’s clients, prospects and lawyers, including Al Turco who is RIIA’s co-founder. “Retirement income cuts across the business silos, but we can’t achieve the right level of conversations within our existing associations and business structures because they are product, process or silo focused. We need a new association to address retirement income issues and questions across the traditional product, process and business silos.”
The notion of RIIA goes back to discussions held in 2003 starting with Al Turco. In 2005, something clicked in place. I had been working on a retirement income conference built around the idea that existing conferences were too silo-specific. It was becoming clear that the retirement income discussion was not taking place to our clients and to our prospects’ satisfaction. There was an emerging need to have a new type of retirement income conference. This led to a conference that I chaired in June 2005 organized by IIR and held in Boston.
The conference was more successful than we had expected and, as a result, led to the IIR’s and RIIA’s very successful Managing Retirement Income (MRI) conferences in Feb. 2006 and Feb. 2007. Along the way RIIA was formally constituted and the 2006 & 2007 MRI conferences doubled up as RIIA’s Annual Meeting.
Macchia: RIIA had a fulfilling first year. Talk about the progress you’ve seen.
Gadenne: The first challenge was to make RIIA real. We accomplished this in less than a year. The second challenge is to make it permanent. This is accomplished by reaching critical mass in several areas: Membership, demonstrable value-added and relevance, and Budgets. Once it’s permanent, then you have to make sure that it thrives.
It was very rewarding to see that RIIA became real in less than one year. It just blossomed on us. Companies started to join rapidly. Since RIIA is a volunteer organization, where the work is performed by the members and for the members, we reached a critical mass in all areas and we reached it faster than planned.
Macchia: Why did so many prestigious organizations so quickly gravitate to RIIA?
Gadenne: This is a typical case of being lucky at the right time. RIIA is doing the right thing at the right time and at the right place. There was a need, and RIIA’s goals and structure fill that need well.
The membership realizes that it’s a volunteer organization, not an organization where a bureaucratic administration seeks to impose its preconceived, or politically correct, notions upon the membership. As a result, different types of deliverables emerge, different types of activities happen. Initial ideas quickly turn into committees, turn into specific projects with goals, turn into valuable deliverables. Members are involved and the rapid results motivate them to stay involved.
In the first few months, the Education Committee delivered the first training course for RIIA’s Retirement Income Expert certification, The Research Committee delivered the first quarterly research deliverable, the Communications Committee delivered the website ( www.riia-usa.org ), etc. It all moves very quickly.
Macchia: Talk about the types of members RIIA attracts.
Gadenne: In typical RIIA fashion, membership categories are developed by the members as new challenges and opportunities appear. RIIA has several membership categories.
RIIA began with about 30 Founding Members sorted into two categories; Regular Members, organizations that are building retirement income businesses, and Associate Members, organizations that provide third-party services to Regular Members. These are RIIA’s full memberships with all benefits and obligations.
As the Regular and Associate memberships grew, discussions started and deliverables followed rapidly other types of industry players asked if they could get involved: Plan sponsors, financial advisors, academics, silo-focused associations, etc.
In response to this demand, RIIA created new membership categories to accommodate their needs as well as their funding abilities. This created a second set of membership categories with lower cost and matching benefit levels. You can see the details on RIIA’s website.
Some leading Plan sponsors asked join RIIA’s discussions and activities. RIIA created a Plan Sponsor membership category. Leading financial advisors, who often times have expressed frustration that their companies are not moving fast enough, asked if they could join RIIA to be where the action is. RIIA created a Financial Advisor membership category.
We have a number of leading academics who have become very interested in RIIA’s activities, people like Moshe Milevsky, Meir Statman, Zvi Bodie and Shlomo Benartzi, so RIIA created a membership category called Special Advisors to the Board.
Then we heard from leading product and processfocused associations who wanted to leverage their specific mission with RIIA’s extensive membership and activities. RIIA created an Affiliated Association membership category.
This process is on-going. RII is currently considering an Honorary Membership category as some members have changed jobs to move to more distant industries and seek to retain a relationship with RIIA. The membership level increases daily, you can see the latest membership information on the RIIA website.
Macchia: In terms of RIIA being a different sort of organizations, focusing exclusively on retirement income, cutting across industries and silos, positioning itself as the preeminent thought leadership vehicle, attracting all manner if large companies and innovators, attracting the leading lights of academia, it’s a very interesting combination that has resulted. I’d like you to explain who gets helped by this, and who, if anyone, gets hurt?
Gadenne: It is too early to have winners and losers. RIIA exists because something new is being created. RIIA is about building and growing the pie, not sharing the spoils of a zero-sum game. This may change when growth slows but there is a long way to go before we get there.
Another reason is that RIIA is not about making statements that might cut the pie into winners and losers. Rather, RIIA is about asking questions. It is about asking the right questions so that members do not end-up making decisions that result in dead-ends.
The reason why it works is that we don’t show-up saying, “Please kneel, I’m going to tell you how it is or isn’t.” It’s quite the contrary. Things are different, things change, it’s pretty messy out there and we’re having a hard time figuring out what’s what. Why don’t we get together and figure out what are the right questions to ask. This is RIIA’s function, and why its thought-leadership is so evident.
RIIA is a place where we can all ask questions and not run the risk of being ridiculed, railroaded out of town, or ostracized. RIIA is a place where people from very different backgrounds can come together to talk as opposed to a place where there is a stated dogma, and if you don’t fit into the dogma you’re out. So everybody wins, there are no losers because the purpose is growing the pie, not promoting a specific way of slicing a fixed pie. Exactly how that pie will grow, and in what directions, well, that’s exactly what the effort to define the right questions is all about.
Macchia: I’d like to ask you about something that I’ve heard and that I feel needs to be addressed directly. This has to do with a view of some who feel that because RIIA was moved to reality by an entrepreneur, and because you are still an entrepreneur, at least part time, that somehow RIIA lacks the level of legitimacy that another organization might have. Now as a Board member I know that this is not valid criticism, because I know how lily pure RIIA’s operations are conducted. But I’m interested in your view of this issue?
Gadenne: The first thing I’d say to those who have concerns about RIIA’s direction, please give us specifics that can help us become better. Become a member, participate in our meetings, join a committee and see for yourself how we operate, experience our transparency. Read our bylaws, talk to our members and judge from RIIA’s facts not just from your own fears.
For instance, the wording of the question that you asked does not seem to originate entirely from RIIA’s specific facts. RIIA has two co-founders: An entrepreneur and a lawyer. From the very first day, Al and I have worked to give RIIA the right organizational DNA with proper By-Laws, a Code of Conduct, having the Board and the Directors become members of the National Association of Corporate Directors (NACD) to ensure a level of Board professionalism not often seen outside of large corporations, etc.
In most circumstances, change engenders fear and insecurity among individuals and organizations. After all, RIIA is focused on a high-stakes marketplace, we’ve had tremendous growth, we’ve attracted many major corporate members and we’ve innovated. That’s may be viewed as disruptive to some. I believe that such concerns will be best addressed and transcended into value if these individuals or organizations join RIIA. RIIA’s membership structure, including the Affiliated Association membership, is designed to create leverage and value-added opportunities for all.
Macchia: What changes and enhancements do you see coming from RIIA over the next 2-3 years?
Gadenne: Just last week RIIA signed a contract with IIR that will split the original conference into its two components. In the past our conferences functioned as an industry conference- Managing Retirement Income- and also functioned as RIIA’s annual meeting. Going forward, we will continue to hold the Managing Retirement Income conference in February, albeit in a warm weather locale, and we will also offer a Fall Annual Meeting including an Awards Dinner. We will give awards in a number of categories, including advertising, with well-regarded, independent experts lined-up to judge in the various categories.
This fall we will also hold our first Annual Retirement Income Communication Conference to help focus our members on this very important issue.
Macchia: Regarding associations which inherently advocate for a particular product, in what way may such organizations be handicapped in terms of helping the larger industry craft the solutions and processes that will be necessary to fully meet the demand of the Boomers’ retirement security needs?
Gadenne: The have constraints and rigidities in the form of a very specific mission and view in support of a very specific product. When you have a hammer you tend to see all of the screws around you as things that need to be hammered. As the landscape changes and the shift from accumulation to transition to distribution unfolds, it becomes clearer that many of these products provide part of the solution but not all of the solution. The need for cooperation across silos increases. As the shift progresses, the part of the market best answered by specific products may grow, or it may shrink. The developments that may address the market change in a larger and more fulfilling way, in a way that creates dominant market share and stronger companies- may best come from reaching across silos. Join RIIA.
Macchia: I want to ask you about the issue of training for financial advisors. It’s become conventional wisdom that financial advisors long ago acquired the level of knowledge necessary to properly accumulate retirement assets. The second part of that conventional wisdom is that the vast majority of those same advisors have yet to acquire the skills, insights and techniques needed to properly place retirement assets into a distribution mode. Do you agree with this? And if you do, what role will RIIA play in changing the advisor education landscape?
Gadenne: Let me field that in terms of one of the key questions RIIA is exploring: Is the body of knowledge for accumulating assets in a suitable and compliant way different from the body of knowledge necessary to engage in distribution in a suitable and compliant way? The answer is, gee, this is worth looking at! It may be that the body of knowledge that FAs currently have to provide suitable and compliant accumulation is adequate to also have them provide suitable and compliant distribution advice. Then again, maybe it’s not, and that’s the subject of a lot of ongoing discussion and development. I would not place the blame on FAs for having insufficiently trained, it may be that something fundamental has changed here. So, it’s a deeper issue than thinking, well, I’ll take some additional training. That training may not even exist, yet. RIIA is working on it.
Actually, the academic theory (for retirement income) may be in its infancy. This is why we have so many academics associated with RIIA, because those are the issues we’re trying to sort out. This is also why RIIA is creating the Retirement Income Expert training programs and certification, because that’s exactly what it seeks to address- starting from what’s fundamental at the academic level, and how do we reflect that into something that properly trains the FAs.
The other issue is that almost everything we have done in accumulation has come from the institutional world. Modern Portfolio Theory, and pretty much this whole assemblage of financial theory, which is only 50 or 60 years old, is very institutionally-focused and based on clients that have a near infinite investment horizon. We can say to clients with a near infinite investment horizon, that on average, in the long term, blah, blah, blah… it works!
But now when we deal with a retail world, where clients have a finite lifecycle and some hard dates, like a retirement date, well the “on-average” and “over the long term” may not apply nearly as well for some or even for many of the customers. That’s the source of a fundamental shift in the theory as we move from an institutional world with infinite horizon to a retail world with very specific and finite dates. What this may suggest is that the financial world may move from a world where products were sold, and the customer was an investor, to a world where products are bought, and the customer will be more like a consumer.
Macchia: When I look at the current landscape of income distribution solutions I see it breaking down into philosophical-based choices analogous to the various religions we are familiar with. For instance, there’s the distribution religion of systematic withdrawals, or the religion of life time annuitization, or the religion of time-segmented, laddered strategies. And then some of these morphing into combinations, such as lifetime annuitization mated to target date funds. What do you think of this? Do you see the issue this way? And do you think that one of these religions is likely to catapult into a leadership role? Or, will it be solutions that we today can’t imagine which will assume a market leadership position?
Gadenne: All of the above. I mean, all of these things that you mention are adaptations to the changes we discussed earlier, given what we know and what we have on hand right now. For instance, this makes me think of the first Dreadnaught, which was the first ship with steel armor and with turret guns that was put together by the Brits. For the first time, a ship had guns that could blow-up other ships at distances that could be measured in many miles. Yet, for a long time, these ships still had a ram on their bow.. So, when the transition occurred in naval warfare from having a reasonable expectation to be able to ram opposing ships to being able to blow-up opposing ships from great distances, for a long time the ship builders still kept building ships with hulls that were built for ramming.
When you have evolutionary changes you end-up with something like the human appendix. There are design features that don’t really make sense any more yet they’re kept; out of inertia, or irrelevance, or tradition. I look at all these distribution solutions and I say, fine, these are all very interesting adaptations given what we know and the specific needs and market they serve. But my sense is that there are so many open questions that I would not rule out the appearance and the development of additional products, processes, and methodologies that may fill other needs and other markets. The key question becomes: What are the larger, growing and profitable needs and markets?
Going forward we may have all kinds of solutions that meet a specific market, and satisfy a specific need. When we transitioned from horse and buggy to cars, I’m sure there were buggy whip manufacturers for a good long time. If you live in Pennsylvania there’s still a good market for them. Still, most of us prefer to drive a car.
Macchia: You still have the wonderful French gift for analogy.