Systematic withdrawal systems

Rough Notes, Jul 2001 by Hagar, Andy

For a variety of retirement and other savings programs, the check doesn't have to be in the mail

Over the past decade, technology has had a profound impact on the way industries conduct transactions. This is particularly true for the financial services industry. Practices that were inconceivable 10 years ago are now commonplace. Billions of dollars in worth change hands every day without any face-to-face interaction whatsoever between parties. Traditionally, this series of articles has focused on the importance of your ability to interact personally with your clients. However, there are times when less is more in terms of interaction with your clients.

One of the most common and rudimentary--yet highly effective--examples of technology-enabled transactions is direct deposit. With relatively little effort, employers and banks can save their employees and customers a trip to the teller (while cutting their own administrative costs as well) by depositing payroll checks directly into customers' checking, savings or money market accounts. Conveniently, this process also works in reverse. The ability to systematically withdraw funds from those same checking, savings and money market accounts both to pay bills and transfer funds from less productive financial tools to more productive financial tools is one undervalued service P&C insurance agencies can add to their arsenal by adding a financial services arm.

While the mechanism and execution are quite simple, the effects can be significant. Retirement plans (including 401(k)s, 403(b)s, regular and Roth IRAs), college planning accounts (including 529s and UGMAs), and regular brokerage accounts can all be credited through systematic withdrawal systems. Accounts that employ systematic withdrawal systems have the potential to become your most productive and profitable accounts.

There are three major reasons why systematic withdrawal systems work.

1) Out of sight, out of mind & consistency First, systematic withdrawal systems keep the mechanics and logistics of your clients' contributions out of sight and out of mind for them. This means that your clients don't have to be reminded to make their monthly contributions month after month after month. They save your clients the nuisance of having to get out the checkbook, write the check, fill out the return address, add postage and get to the post office to service their account(s). You can handle all of that for them easily and efficiently.

Together the two of you decide what actions and which investments will be best suited to their goals and needs. These systems allow you to cut to the chase and ensure execution. They allow you, their agent and trusted advisor (and your financial services representative), to continue to produce, not chase down monthly, bi-monthly or quarterly contributions, minimizing administrative efforts/costs. They allow you to steadily and assuredly build assets that bring you ever closer to accomplishing the goals you have set and keep your clients' assets productive. Once you have demonstrated that this model works for your clients, the credo, "If it ain't broke, don't fix it," becomes your new best friend.

Not only will you see an increase in revenues, in the long run I believe you will see gains in efficiency and time savings greater than or equal in value to that increase in revenues. It bears repeating that accounts that employ systematic withdrawal systems have the potential to become your most productive and profitable accounts. Brandel Eldridge with The Hagar Group in Crystal River, Florida, says that roughly 10% of his brokerage accounts employ systematic withdrawal. "It's the process that matters. Once online, these accounts provide reliable, consistent income for brokers and their agencies. However, 100% of my 401(k) clients use employee deferrals to fund their retirement plans."

2) Dollar cost averaging--avoiding market volatility

This form of consistent and regular investing--often called dollar cost averaging--can help remove some of the emotion involved with market-based investing. Investing the same amount at consistent intervals keeps your client from having to time the market. It removes the risk of investing at the top of the market while conversely providing an opportunity to take advantage of a down market since your clients will end up buying more shares when prices are down and fewer when prices are high. This method cannot protect against a loss, and your clients must be willing to continue investing when market news is bad. However, it can smooth out the peaks and valleys investors can always expect from the market.

Mechanical steps

Broker-dealers as well as product vendors have in-house standardized forms required to set the wheels in motion for systematic withdrawal arrangements. Executing the arrangement by filling out the required forms is a one-time exercise that designates either a standard monthly dollar amount or percentage to be withdrawn from the source account (in addition to the pertinent account numbers, etc.). The form will also include date specifications that often correspond with clients' pay periods. Once you and your client sign the document, it usually takes 15 to 30 days before the first transaction is executed, depending on the efficiency of all parties. More important, once the document is signed, your client has employed a disciplined approach to investing in perhaps the simplest way possible.