Active Mgmt For Retirement Income

Active Mgmt For Retirement Income

Barry Wheeles of Sound Income Strategies argues for active management to protect retirees from inflation and low yields.

Reviewed by: Dan Mika
Edited by: Dan Mika

Barry WheelesThe Federal Reserve’s pandemic programs are likely to start wrapping up, with a taper of a corporate bond-buying program likely to be announced by the end of 2021, and most central bank officials have signaled target interest rate hikes by 2023. In the meantime, savers must navigate an environment where yields are near zero and often negative once inflation is added to the equation.

Barry Wheeles, director of Sound Income Strategies RIA, spoke with on what he thinks advisors need to do to keep retiree clients from overextending their savings. The following interview has been edited for clarity and brevity. I'm looking at the 10-year Treasury yields adjusted for inflation, and mostly since the beginning of 2020—except for a very short time during the start of the pandemic—it’s been negative. As someone who advises retirees, what do you make of this situation?

Barry Wheeles: Because we're here at the Morningstar investment conference, I'll give them a little tip of the cap: They came out in 2013, almost a decade ago, with a really seminal work. And the report was the 4% rule is not safe in a low yield world.

So historically, the rule of thumb for most financial managers—and this worked really, really well in the '70s, '80s and '90s and a little bit in early 2000s—as long as you were only withdrawing around 4% of your portfolio in income and dividends or principal, you should be able to live a very comfortable retirement.

This report came out in 2013, and essentially the bottom line was, according to their numbers, if we get into a low interest rate environment with high equity valuations, like we are today, over 50% of retirement portfolios built around this 4% rule would fail.

This report was the one that scared us back in 2013 and got our attention. So now fast-forward to where we are in 2021, and it really is a challenging environment for investment advisors and managers to try to overcome that 4% yield.

I think interest rates topped out in '81 at 15% on the U.S. Treasury, but you could find 7% and 8% dividend yields—very, very safe, high quality stuff—so overcoming a 4% withdrawal rate was fairly easy to do. It’s very complicated and much harder [today] to do that for the majority of the landscape for investment options out there for advisors and for managers, really hard to even get close to a 4% number.

We've got to find better solutions out there because it really is a potential crisis for anyone born before 1968. Those are the clients we serve. We focus on generating income-producing portfolios just for this segment. Because again, we feel like there’s a big risk in a lot of these retirement plans that were based around this 4% withdrawal yield rule that just can't carry on in today's environments. What are those strategies that you’re implementing right now for those clients who are at risk?

Wheeles: On the SMA side, it really is bottom-up fundamental security selection, whether it's in the universe of fixed income securities or equity-based dividend-paying securities. It really is bottom-up fundamentals–not indexing—because there are a lot of blurred lines and big baskets that are low cost and easy to buy with ETFs, but the quality and the security selection really isn't the same.

We’ve been managing since 2014 an SMA structure to drive yields above 4%, or net after fees a 4% withdrawal rate for our clients. We serve 5,000 households across the country in those strategies.

In 2020, we looked at the landscape and all the options that are out there and [wondered] how do we get above this 4% number for clients and potential clients. We launched two new ETFs: the Sound Enhanced Fixed Income ETF (SDEF) and the Sound Equity Income ETF (SDEI). They both yield over 4%. One is a fixed income securities portfolio only. The other one is an equity dividend-paying portfolio. But again, the mantra is to make sure the owners of those investments can net over a 4% dividend yield. What do you make of the current environment for people who are looking for income, but fear equities are overvalued and due for a correction? A lot of the safest securities out there are essentially losing people money after inflation is considered.

Wheeles: I have two answers to that. It's another cornerstone to our base case, where we really feel like a lot of investment advisors just haven't been exposed to the universe of income securities out there.

A lot of advisors joined the industry in the early 2000s and they've never really had to navigate portfolios in a rising interest rate environment or a rising inflation environment. So it really comes down to individual security selection and product knowledge, market knowledge that a lot of advisors unfortunately just don't have.

If you're really focusing on building a true income portfolio, there are a lot of different factors to take into a case, not just credit rating and yield or maturity, which a lot of advisors use as a topline base. You really have to dig into security selection.

One of the things we do for security selection is ask, is it a value, or is it a value trap? There are a lot of times something might look interesting, parameterwise, from a value standpoint—high dividend yield, decent cash flow, interesting industry, maybe they dominate a particular sector—but you've got to really do the craftsmanship and the individual security selection. You've got to interact with the companies. You've got to understand the reports.

We do a very comprehensive deep dive with all of our security selection before they make it into the portfolio. The ETF that I mentioned, SDEI, has 30 individual companies in there. They all [aim to have] a dividend yield of over 4%. Those are handpicked securities from our investment committee, and are probably [a close reflection of] how we manage the SMA strategies.

Again, it's our belief that there are a lot of value traps out there, so individual investors and professional managers need to be really, really cautious of not stepping into a value trap, and really uncovering true value.

There’s a lot of value in this market as well, but it's just not as easy as buying an index. You really have to roll up your sleeves and do the analysis.

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Dan Mika is a reporter for He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.