Financial Planning – When to ignore this client request
By Mark Stevens
May 12, 2016
Advisers whose retirement planning strategy for clients is to beat the market need to confront a difficult truth: They have no strategy.
For years, clients have asked their advisers to outperform the markets to a degree that it has become a mantra. The problem is that the goal in this scenario isn’t related to clients’ personal retirement goals, and the path to beating the markets often involves taking on additional and unnecessary risks.
Deafened by the noise of cable finance news, keeping up with the Joneses and a strong dose of fear, many retirees and near-retirees are overweight equities.
Although these assets have a meaningful place in many portfolios, too much inclusion of equities later in life introduces two key issues.
First, the level of risk is high, so advisers and their clients need to ask if they actually need to assume this risk. Second, allocations to equities often garner higher investment fees.
Together, these issues offer a one-two punch to a client’s retirement plan that can be easily avoided.
This epidemic of being overweight equities is seen particularly among those investors who are closest to retirement.
Too often, these individuals are looking at the output of high returns instead of asset retention, conservation and cash flow. Without years to recover capital, such clients need to take on only as much risk as is necessary for their goals.
They don’t always need home runs and grand slams; singles and doubles are perfectly fine.
Trusted advisers must help clients focus on how close they are to their retirement goals instead of how their portfolio is doing compared with the day-to-day markets. This starts with defining retirement in a structure that is much more concrete than “as wealthy as possible.”
Figure out the amount clients need for their golden years, and reverse engineer a path to the level of returns actually needed to reach their goals. Often, it is well below benchmark returns, which means that advisers can increase the probability of success, and clients love a high probability of long-term success much more than they love beating the market in the short term.
When an adviser solves the income need first, clients won’t be worried if they aren’t outperforming. In fact, clients become excited about the calculated level of lack of risk.
Advisers should mathematically define the probability of success and work hard to make sure that clients stay on track. This solutions-focused approach allows client conversations to be more open and focused as clients see progress in terms of their own goals, not the markets.
That will help clients focus more on traveling the world or spending time with grandchildren, not whether they outperformed the S&P 500 last week.
A top fear among retirees is that that they will outlive their money, and while this is a natural concern, it is important that advisers don’t have a knee-jerk reaction and increase portfolio risk while chasing high equity returns. Reduced volatility will give clients peace of mind about retirement, and not watching the markets all day allows them to do what they should be doing after a lifetime of hard work: relaxing.