Francois Gadenne and the Formation of the Retirement Income Industry

Francois Gadenne is the Chairman and Executive Director of the Retirement Income Industry Association (RIIA).

Formed in 2006, RIIA is bringing together the leading minds and resources in the relatively young retirement income industry.  RIIA members include leading academics, banks, insurers, fund companies, financial advisors, brokerage houses, researchers, technology companies, marketing firms, consulting firms and media.

RIIA’s mission is to bring these often disparate industry actors togetherto share information and create a “View Across Silos.”  RIIA is essentially laying the foundation for an entirely new financial planning field that seeks to provide millions of retirees with a solid base of sustainable retirement income.

Read on for insights into the formation a new and much needed discipline.

Annuity Digest: Can you describe the Retirement Industry Income Association (RIIA)?

Francois: RIIA’s mission is as follows:

RIIA provides the space, discussions, communications, research, education and standards that derive from its unique perspective (“The View Across the Silos”) to help investors, distributors and manufacturers in financial industry transition from investment accumulation to retirement management and income protection.

Annuity Digest: What drove you to form the association?

Francois: I am a serial entrepreneur. While doing a start-up called Retirement Engineering, clients and prospects asked me to also start a retirement income trade group for them that would be truly function like “Switzerland.” Their observation was that traditional, lobbying-focused trade groups always gave the same answer to retirement income questions, that which they lobby for. They felt that retirement income was a major shift that was not going to be solved with more of the same. RIIA was founded as The View Across the Silos. Members come by design from all business silos in the financial industry. The founding meeting was Feb. 1, 2006.

Annuity Digest: How have things progressed over the past few years?

Francois: RIIA took off to the point where about two years ago the Board asked me to run it full time and to put Retirement Engineering in a blind trust.

Annuity Digest: What interesting issues is RIIA working on at the moment?

Francois: All work is driven by the actions of the Committees. For instance, the Education Committee launched the Retirement Management Analyst (RMA) designation, The Research Committee publishes a regular schedule of report and membership calls, The Methodologies Committee has released a statement of principles to set standards and benchmarks for advisory and simulation software, the Social Networking Committee is developing a self-help site for investors who cannot afford the cost of advisors, the Employment Survey Committee interviews members and non-members twice a year to report on trends in the retirement income industry, the Programs Committee runs our Spring and our Fall meetings, etc.

Annuity Digest: You have spent much of your career in the retirement income industry.  What is the current public perception of the retirement income industry?

Francois: The retirement income industry is emerging in its own right as something related but yet different from the traditional investment industry because its goal is not the management of expectations but rather involves the creation of outcomes.  This distinction may be missed by many in the industry but I think the public understands it intuitively.

For instance, the 401(k) is not a retirement income vehicle, it is an investment accumulation vehicle. Retirement income is not a different word for wealth generation but a word for creating a smooth standard of living. We are not leading the public—we are following the public’s expressed desire for a smooth standard of living.

The retirement income industry needs to avoid focusing on the problem statement that has provided the basis of the investment industry over the past 30 years because it is one dimensional.  When in retirement, the problem statement is two-fold and very different—namely, what are your assets and are those assets sufficient to produce reasonable income.

The problem statement needs to be retirement-oriented rather than investment oriented.  For example, the variable annuity confuses everyone because it is not simply an annuity and the products ultimately came from asset accumulation mindset.

Ultimately, the fundamental way of looking at the retirement income problem is not going to be sufficiently addressed through the old asset accumulation perspective.

Annuity Digest: Is there a disconnect that exists between public perception or awareness and the importance of the retirement income industry’s products?

Francois: There may be a disconnect that exists as a result of the fact that most people do not deal with annuities earlier in life.

That said, this disconnect is debatable and is ultimately self-fixing as the customer develops greater awareness of the products as they age.

Annuity Digest: How would you describe the retirement income industry to a general consumer audience?

Francois: Retirement income is about the following goal: to create a smooth standard of living, first build a floor and then expose what is left to upside. The fundamental focus is on consumption rather than accumulation and growth of financial assets.  This makes it related yet different from the investment industry.

The practice of retirement planning starts with the ratio of consumption to financial capital.  The discipline is multi-dimensional and accounts for multiple sources of capital such as human, social and financial. 

Retirement planning is a complex, multi-faceted discipline that will evolve into a profession.  It is clear that the field of retirement planning is something new and different which requires a new curriculum.  RIIA is addressing this need.

Annuity Digest: The academic foundation or “case” for guaranteed income and annuitization is clear and compelling.  How do academia and industry get this important message out in a manner that truly engages a consumer audience?  How can annuities and other retirement income products become more accessible and easier to understand—how does the notion of sustainable retirement spending become as ubiquitous as the mutual fund and asset allocation?

Francois: This question comes from the wrong angle. It comes from the angle of forcing a solution on a problem and a public.  You need to start with the problem statement to see where annuitization may fit. This is not a matter of better persuasion but a matter of fitting in the right problem statement. This is one of the major advances of the RMA curriculum. The traditional investment, accumulation problem statement is one dimensional. It is about generating wealth for the client and gathering assets under management (“AUM”) for the advisor. The key dimension is AUMs.

The retirement income problem statement has two dimensions. It introduces another variable, annual consumption, in addition to AUMs.  Consequently, the client segmentation becomes driven by the ratio of consumption to AUMs. Over time, the advisor can work with the client to refine a consumption value that is smoothed over the life-cycle and that can be net of income from human and social capital sources but the driver is still the two-dimensional ratio of consumption to financial capital rather than just the one dimension of AUMs.

Annuity Digest: Is it important to directly engage a mass consumer audience?

Francois: Yes, it is fundamentally important to engage a mass consumer audience.

The ratio of consumption to financial capital shows that some will be underfunded (say a ratio above 7%), others will be constrained (say a ratio between 3.5% and 7%) and a few will be overfunded (say a ratio below 3.5%). Traditional investment, accumulation focus will continue to work with the overfunded clients. Underfunded clients may need to look to human capital and social capital solutions rather than financial capital solutions. Constrained clients are the ones who can benefit the most from the mortality credit.

Another way of saying this is that there is a mass consumer audience as we move “down market” according to asset market segmentation.  There is a large part of the population that does not fall in the category of “high net worth”, and this large audience is in need of the products and services provided by the retirement income industry.

The traditional business model of the investment industry (let’s call it the collection of AUMs or simply “AUM business model”) does not serve this market segment well.  Further, the AUM business model does not easily apply to the retirement income industry.

The emerging retirement income business model requires an “ADP” type of business model or what I would refer to as a “payment of monthly checks” business model.  In other words, products and services need to be intelligently bundled and provided to consumers on a monthly fee basis.

Technology is required to automate and scale this type of business model—thus the ADP analogy.

A similar analogy would be tax preparation.  Maybe things in the retirement income business start to look more like tax preparation where the client is “touched” fairly frequently and the service provider  takes a fee.

The retirement income industry may ultimately be able to charge fees that would not be feasible on the investment or AUM side.

The above said, the questions of what the menu of services is comprised of and how to charge for those services remains open.

Annuity Digest: Is there a need for non-academic and non-industry thought leadership in the retirement income industry?  If so, where might that leadership come from?

Francois: RIIA’s RMA curriculum comes down to three approaches: 1) The Engineering approach; 2) The Economic approach, and; 3) The Empirical Validation Framework.

The Engineering approach is practical and uses what we know and what we have now given: a) the retirement income problem statement consumption / financial capital (C/FC), and; b) the retirement income goal of “first build a floor, then expose to upside.” 

The Economic approach is driven by academic models, which include but are not limited to formal models of risk aversion, consumption smoothing, etc.

The Empirical Validation Framework is RIIA’s unique contribution from the View Across the Silos. Because RIIA provides the View Across the Silos commercially and academically, over time we will be able to see what all parties actually do and report on in terms of the best, empirically validated, standards and benchmarks.

Annuity Digest: How does the retirement income industry attract high quality talent?  Are there obstacles to recruiting the brightest minds and resources to the industry when, in contrast to the asset accumulation business, there are impediments to scale—particularly with respect to distribution?

Francois: I would say that talent follows growth, and retirement income is widely viewed as an emerging growth industry.

Also, RIIA runs a Retirement Income Employment Survey twice a year. Results are for members only.

Annuity Digest: Are there examples of great consumer product companies in the retirement income space?  In other words, who is the Apple of retirement income—is there an individual or company that is able to “take the MP3 player and turn it into an iPod?” 

Francois: It is too early to tell. The first wave of change was to put new labels on old wine. It has not worked well enough to scale up. Only now do we see second generation products and processes. Our spring meeting (end of March at Morningstar/Ibbotson’s conference facility in Chicago) will provide a forum for some of those products and processes.

Annuity Digest: If this company or person does not exist, where are they likely to come from?  If it is from within industry, is it a product manufacturer, a distributor or a trade association?  If outside of industry, what qualities and characteristics would be necessary?

Francois: Check-out “The Innovator’s Dilemma” by Clayton Christensen. I think we will see establish players adapting over time and a few new entrants.

Annuity Digest: Would it be beneficial to have direct –to-consumer distribution in the retirement income industry—for example a GEICO of annuities?

Francois: Because retirement income advisory is more complex than investment advisory some believe that it will be primarily delivered by financial advisors (“FA”). The question is not settled and it is actively discussed by the membership.

Annuity Digest: Based on your experience, who are the most innovative people and companies in the retirement income industry today?

Francois: Come to the March meeting—they will be the sponsors and the speakers.

Annuity Digest: What are your thoughts on the role of technology, online media and social media in light of public awareness and understanding of the retirement income industry?

Francois: Check the work of the Social Networking Committee for investors who are too small to afford financial advisors. I think such discussions must start with a definition of the client which we discussed earlier.

Annuity Digest: At this moment, what would be the greatest improvement to the retirement income industry?

Francois: More companies joining RIIA so that we can do more work and faster.

Annuity Digest: What new developments and/or products should consumers be thinking about and watching?

Francois: Check out RIIA’s Advisory Process as presented in the RMA curriculum. Many RIIA members are software companies that are building calculators and complete platforms to teach the RMA curriculum and to support the chartered financial advisors in their client work. Look for those companies and those software products. They will be very valuable.

Annuity Digest: Many thanks for your time Francois.