Blind spot for advisers: Clients’ behavior
When comparing investment options, advisers need to look beyond traditional benchmarks such as alpha and fund manager tenure
To make sure seniors don’t outlive their savings, advisers need to factor in their clients’ financial behavior — rather than focusing solely on average investment returns.
During an InvestmentNews panel discussion today in Chicago, Emilio J. Morrone, principal at financial planning firm NothelferMorrone, said that advisers must realize that clients — particularly baby boomers who are facing retirement — are not just depositing lump sums of money and leaving the cash untouched. Rather, they’re using their accounts within a given period.
Thus, when comparing investment options, advisers need to look beyond traditional benchmarks such as alpha and fund manager tenure. Mr. Morrone believes that advisers should also consider investor behavior over time. And that behavior must be squared with the sequence of returns and cash flow when trying to figure out a portfolios’ actual return to the investor, Mr. Morrone said.
“‘What are my chances that this will work?’ would be an interesting dialogue to have,’” Mr. Morrone said. “I want a portfolio tool called a mutual fund in my practice that has a high probability of working for my client.”
That probability goes up when an adviser is able to balance income generation and risk. The dilemma is that these days, retirements often span 30 years or so. To generate a high-enough return to cover a retiree for three decades, an adviser has little choice but to ramp up on equity — and that hikes risk.
Fellow panelist Peng Chen, president of Ibbotson Associates Inc., said that immediate fixed annuities and variable annuities (with a guaranteed-minimum-withdrawal benefit) can help guard against longevity risk. Indeed, Mr. Chen said, there are certain investors who would benefit from adding these insurance products to their portfolios.
“We found that typically, the biggest allocation toward insurance products is for those investors who have saved enough money just for retirement income,” Mr. Chen said. They’re not superwealthy, and they’ve saved just enough for income.”
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