I answer an FA’s Question about The Income for Life Model® vs. The Grangaard Strategy
Recently a financial advisor asked me to compare Wealth2k’s The Income for Life Model® program with another popular income distribution program called The Grangaard Strategy, developed by Paul Grangaard, CPA. This inquiry surfaced because of advertising which characterizes The Grangaard Strategy as, “The 6.6% Retirement Income Solution™”, and states, “Expert Explains How to Increase Retirement Income over 50%.”
Firstly, I commend Mr. Grangaard for his work and continuing efforts to focus advisors and investors on the importance of adopting a well-conceived strategy to generate long-term, inflation adjusted retirement income. That said, I can and will address some of the contrasts I see between The Income for Life Model and The Grangaard Strategy, and where I see The Income for Life Model having both structural and competitive advantages. Visit Phil Lubinski’s website to watch a movie on The Income for Life Model.
I’m a great believer in the notion that a diverse group of income distribution strategies are emerging, that more will emerge in the future, and that each will have its adherents largely decided along long philosophical beliefs analogous to the diversity we know with religions. Financial advisors will eventually migrate to one of these “distribution religions.” For instance some may select the religion of systematic withdrawal programs, or the religion of lifetime annuitization, or the religion of laddered strategies. Some of these strategies will cross-pollinate i.e. lifetime annuitization mated to target date funds. Both The Income for Life Model and Grangaard are examples of time-weighted, laddered strategies.
In terms of comparing The Income for Life Model with The Grangaard Strategy, here are some of the differences I pointed out to the financial advisor:
The first difference is in the underlying rate-of-return assumptions. Rate-of-return assumptions for The Income for Life Model (IFLM) were developed to be realistic across virtually all economic scenarios. For instance, The Grangaard Strategy (Grangaard) assumes 5% for the first, near-term investment bucket or “segment”, as we refer to it, versus a 2% assumed rate for The Income for Life model. About Grangaard, the first question I would ask is, “Where could you find 5%, say, three years ago?” It wasn’t possible. We simply view the issue of short-duration rate-of-return projections more conservatively.
Grangaard’s assumptions continue to assume more aggressive returns over succeeding segments. For instance, 9% on a ten-year hold versus 6% for IFLM. Grangaard also presumes a return of 10% on a fifteen year hold versus 8% for IFLM.
These are relatively large differences in assumed returns which we would not be comfortable using.
My understanding of the Grangaard strategy is that it uses historical “average” rates of returns. In a perfect bell-shaped curve, you would fall short of the average 50% of the time. Although there may be several rolling periods that didn’t fall significantly short, The Income for Life Model’s assumptions allow advisors to be delivering “good” news a higher percentage of the time. If the higher rates of the Grangaard assumptions are met with that model, it would be reasonable to assume they would also be met in the IFLM, thus allowing IFLM to deliver higher income without over-promising up front.
Grangaard uses, I believe, Ibbotson chart numbers combined with historical testing back to 1936. We have determined that the years most prone to deliver poor results were 1927-1930 and 1932. Had we eliminated those years in testing for The Income for Life Model we could have significantly boosted its initial income rate of 5.66%. The combination of not using the worst time periods, plus allowing nothing for investment expenses, allows Grangaard to project higher income levels.
Which leads to a very significant difference in the Models: as far as I can tell, Grangaard doesn’t calculate any compensation for the advisor. This is a very real issue. A large, independent broker-dealer which offers IFLM to its advisors tested IFLM assuming average investment product costs of 2%, and still concluded that it delivered 87% reliability. If you add to this a procedure called, “Risk Free Sweeping™”, the probability of IFLM increases to 90%. Again, this is derived from objective testing done by large broker-dealer customers that offer IFLM to their advisors.
Another advantage: The Income for Life Model is backed by an array of high-tech communications tools- including advanced, web-based tools- that are critical to providing solid education to consumers. These same communications tools also serve to educate advisors.
Although both Models, IFLM and Grangaard, potentially have the same investment opportunities, our research indicates that IFLM’s less aggressive assumptions, obviously, would have the higher probability of success. Most importantly, IFLM includes the most critical ingredient…the advisor!
©Copyright 2007 David A. Macchia. Al rights reserved.