This is more-or-less tongue-in-cheek in case you need to know that before we get too far. I'm just playing around.
What is RULC? Let's start with EDULC first. EDULC is the "expected discounted utility of lifetime consumption." This is the lifecycle econ idea that one might want to plan to optimize aggregate consumption utility over a lifetime and, if one were to randomize and simulate the plan a bazillion (random) lifetimes, the average of the plan over the bazillion is the expected value of the plan. And then we would try to optimize that number by playing with stuff like (primarily) the consumption plan, returns, vol, longevity, etc. Ignore for now whether this is a valid or appealing thing; assume that it is. Plan to spend too little and one would under-optimize planned consumption on average. Over-consume and one is likely run out of money at some point and end up consuming at whatever income is available at that time which, again, underoptimizes lifetime utility via the utility penalty for a much reduced level of consumption in the future (ignoring annutization for now which would have a big impact). Have a good but lumpy plan that is lumpy at the wrong times and one might still have a non-optimal plan due to the convexity (or is it concavity?) of the utility math. Also, consider that if a plan is made at day zero, by day 1 things have already changed and vitiated the day-zero plan so that we probably have to re-plan again for day 1. And so on.
So what is RULC? If EDULC is the expected value of a plan, RULC would be "realized utility of real lifetime consumption" at the end of the road. I made RULC up out of thin air, by the way, but it would be what ended up happening to us consumption-wise when looking back from the day we die. It is the thing, ignoring bequest for now, at the end, that we supposedly want (to economists anyway) more than anything else (anything else like high returns, low vol, efficient portfolios, constant spending, particular fee arrangements, alpha, minimized drawdowns, etc. though all of these no doubt interplay with each other just a little tiny bit).
I've heard that some people sing in the shower. Me? I think about retirement finance in the shower (no doubt very likely making a case for involuntary psych commitment) and today I was wondering through the shampoo: if the paragraph above were to be true (no odds on that, btw) what would happen if we happened to pay our financial savants and advisors based on the outcome we are supposed to want the most (in order to play this game assume that that desire is RULC)? This is what I came up with so far for what might happen:
1. It wouldn't likely ever happen at all. The time deferral between outcomes/payment and the efforts to plan and control would probably be a non-starter for an advisor. And who would finance it if one couldn't wait? Also, utility, while maybe ok but debatable in the relative terms where it shines, is probably a bad metric in absolute terms. We'd have to compare the end utility against some set of hypothetical alternative lives we didn't live. Or maybe vs some benchmark cohort of other people that have similar risk and lifetimes. Good luck. Maybe better to back it out to some type of ex-post certainty-equivalent dollar value and pay on that. That might be a little confusing, though. And that's the other point. All this is fun to play with in a blog but it is also somewhere between opaque and incomprehensible to most retirees not to mention their advisors. If that's not enough, then we can also ponder the idea that the vicissitudes of life (think medical bankruptcy or un-budgeted long term care) on any one path through it would probably totally swamp the manageability of any rational compensation system based on RULC.
2. Interest in asset allocation might fade to the background? If we, doubtfully, made it past item 1, then we might see that asset allocation could get less interesting. I have not run this very carefully yet with respect to different risk aversions and allocations but I'll at least try once (or if) I get my software back; maybe in a few months. Based on past simulations and reading, my guess, based on the lower risk aversion coefficients, is that one might find oneself generally avoiding fixed income allocations above 60-70% and below 10-20% but otherwise be mostly indifferent in-between. The efficiency of the portfolio in eff frontier terms, on the other hand, would probably be way more interesting than exact allocation (this is why alt risk and trend following in the presence of consumption and sequence risk seems so appealing. All this needs a more formal look, though. Newfound research recently did some interesting work in this area using backward induction and SDP). But these thoughts are nothing more than a vague "proof by guessing and asserting" so you can take it with a grain of salt. I'll try to take a look at this at the end of summer.
3. Spending would sort up to the top of the pile of "levers." The outsized impact of consumption plans and spending control would become very very apparent. This is another area, like #1, where an advisor would balk. They have no real control over spending. This would either kill the RULC idea entirely or spark innovative arrangements I cannot even imagine. Maybe there would be some kind of comp adjusted by variance from planned budgets over a lifetime...or something....
4. The passive "part-owner investor" would morph into a life-utility-maximizing-owner. This seems obvious and in theory is where we are today. But too many retirees, due to fear, confusion, mis-direction or maybe advanced age, seem to hand a "portfolio" over entirely to an advisor (i.e., they are a "part-owner" at that point) and the advisor then worries only about asset allocation and single-period portfolio metrics that are isolated from the whole multi-period-consumption-over-a-lifetime-utility-problem picture (and who can blame them). If, however, consumption were to sort to the top and utility were to be the metric and advisors were to predictably beg off of ownership of any lifetime outcomes, only one person (or couple) would be left: the retiree...and they would no longer be single-period investors, they'd be lifetime consumption-utility maximizers. And they'd own the whole problem. But that really describes how things are now even though the idea is underappreciated or misapprehended. But again, this would all be terribly confusing, I think, when rendered in the way I'm pitching it.
5. Industry products and roles would change. Much like we are starting to see today in a world of low-or-no commissions, AUM fees, passive indexing, fee compression, etc., alternative fee arrangements (e.g., retainers?) and roles (service based coaching) would start to become more common. Investor ed would be a bigger deal. Whole-lifestyle management and monitoring software and systems would be more robust. Payment and monitoring metrics would focus more on income and outcomes than wealth and inputs. Income-focused and structured-low-vol products would likely find more demand and distribution. Annuities and annuitization would become endlessly fascinating and, one might hope, the market more complete and efficient.
6. Interest in client health and longevity would go up. Yes, a short life and low consumption would be a bad payout opportunity. So would a long life combined with a client running out of non-pensionized wealth too early. But with just the right income and consumption plan, an advisor would become uniquely fascinated with their client's health and longevity. Short of client immortality with a perpetually sustainable spend, where it might be hard to collect the advisor comp, a long healthy life of highish, sustainable spending might pay off quite handsomely. Let's say their interests would be aligned.
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