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RBC Managed Payout Solutions

Take your payout. Protect your wealth... potentially.

December 9, 2010 - 6 comments

Retirement income distribution is on the minds of many investors and advisors alike. Various products have been introduced to help aid in the transition from an accumulating portfolio to one of income generation and tax-efficient distribution. A product that has received a number of questions from clients is the RBC Managed Payout Solution, as well as the Enhanced and Enhanced Plus versions of the same fund. It appears that no matter how RBC phrases its marketing message, clients are still under the impression that RBC Managed Payout Solutions are offering a generous 5%, 6%, or even 7% guaranteed income (if only this were true). RBC’s offer is in fact a non-guaranteed monthly payout, with no guarantee whatsoever of investment returns. The actual dollar value of the monthly payouts can fluctuate significantly year-to-year, making any cash flow planning futile. No inflation increases are built into the payout calculation, so unless a client receives very generous market returns, inflation will erode the purchasing power of their monthly payouts.

In RBC’s simplified prospectus, the following investment objective of the funds is included:
“...provide relatively tax efficient distributions...without continuing significant erosion of the net asset value of the fund.”

By examining a hypothetical investment of $100,000 in each of the funds on December 31, 2004, it appears that all of them have experienced erosion of the net asset value of the fund over a 5-year investment horizon, ranging from $8,333 to $18,841 (see graphs below). Although the negative events of this particular period were a key contributor to this net asset value erosion, I couldn’t imagine an aggressive 7% withdrawal rate not adding to the depletion. 

In 1997, William P. Bengen published a series of articles in the Journal of Financial Planning titled, “Conserving Client Portfolios During Retirement,” in which he determines a safe maximum withdrawal rate that has historically resulted in a 30-year portfolio longevity, regardless of the year of retirement. Bengen determines this rate to be approximately 4.15% of the original market value for a typical balanced portfolio, increasing with inflation each year. I would be much more comfortable with a product that distributed tax efficient cash flow at this rate, although I admit, its features would not look as appealing on a glossy marketing brochure.

By: Justin Bender with 6 comments.
Comments
  15/12/2010 9:48:37 AM
Justin Bender
Hi Moira - glad to hear you're an investor who does her homework first before diving into a new product. The Guaranteed Minimum Withdrawal Benefit products would also be great topics for discussion - I would be interested to hear what experience investors have generally had with them.
 
  14/12/2010 7:27:52 AM
Moira
Justin,
I agree that this product cannot guarantee monthly erosion or prevent erosion of the capital over time. It is essentially the questionable marketing of a product that is trying to parallel the insurance industry's Guaranteed Minimum Withdrawal Benefit Plan product, without some of the benefits inherent in the insurance product. I would certainly be reluctant to consider it as a mainstay of my portfolio.
 
  13/12/2010 10:50:59 AM
Justin Bender
Hi Nathan - I agree with your comments. It is not so much the product that is the issue, but what the investor's "perception" is regarding the product. If too many clients are of the belief that these products (such as the RBC Managed Payout Solutions) offer a guaranteed return similar to a GIC, regardless of how many disclaimers the fund company places on their marketing materials, the company should be re-examining how they position this particular product with them.
 
  13/12/2010 10:23:41 AM
Justin Bender
Hi Jay - interesting to hear your point of view on these types of products...I never considered the additional pitfall of the investor requiring more cash flow than paid out after a market downturn, only to be penalized with a Deferred Sales Charge upon redemption - thank you for your comments.
 
  10/12/2010 3:23:53 PM
Jay
Excellent article Justin. I agree with your point of view on these products, especially on the erosion of capital. There are other factors that can create major problems with products similar to RBC Managed Payout Solutions. Personally, I had 3 years experience working as an advisor with Investors Group. They offer a similar product, the Alto Monthly Income, and pushed it as a recommended solution to all open portfolios for advisor ease and tax payout advantages. However, after combining a few factors together, you've essentially created the perfect storm for a client's portfolio. What I have seen is the erosion of capital magnified by the infamous DSC (Deferred Sales Charge). Clients expecting a 7% yield for income planning purposes in 2009 were in shock after the markets crashed from 2008. Their porfolios were slashed, ultimately decreasing their monthly income. What many investors were left to do was redeem additional units from their portfolios - sometimes at the highest redemption fee of 5.5% - to supplement their incomes. This ultimately increased the erosion of clients capital.
 
  10/12/2010 11:40:50 AM
Nathan, B.A., CFP, CLU, RHU
I completely agree with this article. Products such as the RBC Payout Solutions deceive an investor by promoting the annual yield of 5,6, or 7% (other companies have similiar products though annual yields vary) which is misinterpreted by many as a guaranteed rate of return. The confusion over annual yield vs rate of return also leads to many investors (and a great number of advisors) to compare such a product to a Guaranteed Investment Certificate (GIC) which has a stated rate of return and principal protection. However, unlike a GIC, products such as the RBC Payout Solution have no guarantee of principal protection. The results of this is that unless the particular fund generates consistent returns that match or exceed the stated payout yield year after year, the client, at best will receive back all of the money they originally invested and at worst will experience an accelerated erosion of their capital due to the poor (in relation to the yield payout) market performance.
 



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