Over the past several years, you may have heard presentations or read articles about the Portfolio Waterfall income strategies. Many advisors I have spoken to find the concept interesting, but then the question is, “Now what?”
The following question is helpful if you’re determining whether to move forward with the Portfolio Waterfall strategy.
“As an investment advisor, do you want to offer your clients a consumption-based income model or a replenishing-based income model?”
Traditional income models are consumption-based. What I mean is this. In traditional income models, units/shares are consumed through pro rata withdrawals. All cashflows are reinvested to buy more shares. If consistent income is needed, additional shares must be liquidated during market downturns. The hope is that, over time, market performance will offset the additional share consumption required during periods of volatility.
On the other hand, the Portfolio Waterfall is a replenishing strategy that limits unit/share liquidations for income withdrawals. Cashflows are not reinvested. Instead, capital gains, dividends, and interest are directed to the stable value allocation from which income is taken. Because the Portfolio Waterfall does not systematically liquidate shares for withdrawals, it can be less price sensitive to market fluctuations and offers a potentially higher withdrawal rate.
This approach involves a philosophical shift from the traditional consumption method many of us learned. But it is precisely this philosophical shift that I believe should help you make your decision to implement the Portfolio Waterfall strategies in your practice. (For more information about Consumption versus Replenishing income models check out the article in the link below.)
After deciding that you want to offer replenishing income models, you need to decide which investment platform would be best for you and your clients. The Leaders Group now has two options for implementing the Portfolio Waterfall income models. The first option is TLG’s proprietary Starlight Portfolios platform. Starlight offers custom branded client portals and completely electronic business processing. The Portfolio Waterfall income models are managed by TLG’s investment committee led by Ben Tiller, CFA. The goal of the Starlight platform is to offer a streamlined business process with comprehensive investment management. More information about Starlight can be found at www.starlightforadvisors.com.
The second platform option is with SEI. The Portfolio Waterfall income models are now available through SEI’s Gateway Manager program. These models are also managed by TLG’s investment committee and are similar to the models on the Starlight platform. This may be a good option for you if you are currently using SEI or if you need more advanced platform capabilities to serve your clients. If you are uncertain about which option is best suited for you, please contact me to discuss it in detail.
Now it’s time to prepare for your initial client conversations. Until you get comfortable presenting the Portfolio Waterfall income strategy, I recommend focusing on clients with whom you have a close relationship. I suggest that you begin with a discussion about how traditional models provide income and why you believe a replenishing income strategy could potentially be in their best interest. Explain that their investment portfolio is made up of units/shares that provide cash flows (dividends, capital gains, and interest), and these cash flows can be harvested for income withdrawals. I would say something like, “Instead of consuming shares and hoping that the price increases on the remaining shares, let’s protect your shares, and harvest the cash flows for income.” I would show them the “Anatomy of a Mutual Fund” to explain the inner workings of a mutual fund share. Then I would use the “Portfolio Waterfall Overview.” This one-page resource helps the client visualize how income withdrawals are taken while limiting share liquidation; it also shows how cash flows are harvested to replenish income withdrawals. This may seem simplistic, but we have seen great success with this approach.
Summary:
Step 1: Decide whether you want to offer a Consumption or Replenishing income strategy.
Step 2: Choose the platform that best aligns with your business model.
Step 3: Prepare your first Portfolio Waterfall client conversation.
All resources mentioned in this article are available to TLG registered representatives and TLGA advisors. Use the links below to download. We have a talented team to help you implement the Portfolio Waterfall in your business. Please contact me if you would like to discuss which platform may be best for you or if you would like additional help as you offer the Portfolio Waterfall strategy to your clients.
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