2017: WHEN RETIREMENT INVESTORS TAKE AIM AT THEIR OWN FEET
LOW INTEREST RATES AND A BOOMING STOCK MARKET HAVE LEFT SOME CLIENTS CONSIDERING RISKY BEHAVIOR.
this year risks being the year of living dangerously for retirement investors. Low interest rates mean conservative portfolios struggle to generate returns. A legacy of undersaving has left many retirees facing a funding shortfall. Meanwhile, stocks’ steady march upward has led some investors to throw caution to the wind.
“With interest rates being so low and the stock markets doing well, we see clients wanting to take on more and more risk, asking, ‘Can we try to juice our return?’” says Paul Gassel, managing partner at Chicago-based WWM Investments, LLC.
Advisors now face the challenge of managing expectations. Gassel’s approach is to walk clients through different scenarios and the impacts they might have on future income streams. “If the market turns and they lose just 5% of their account value, it completely changes the income assumptions in their plan for decades to come,” he says, adding that while most clients come around, those who insist on taking on too much risk can be setting themselves up for failure, forcing WWM to reevaluate the relationship.
The rising stock market is behind much of the shift in expectations, says Jennifer kim, a Los Angeles-based senior partner at SEIA. “Whenever you have a nice run people start expecting nothing but big returns,” she says. “A negative return isn’t even imaginable at this point.” Rather than grow frustrated by clients asking to chase returns, Kim doubles down on communication. “Whenever the market is really high or really low, it makes our job a little more difficult,” she acknowledges. “But these times represent opportunities to solidify our relationships.”
The financial industry and media bear some responsibility for investor performance-chasing. Investors are bombarded by marketing pitches and news reports that focus on new ways to goose returns and who is beating whom. “Yes, it’s not unusual for someone with a low risk tolerance to question why the S&P might outperform their portfolio in a given year,” says New Yorkbased Jolie Ann Calella, CFP ® , vice president and senior portfolio manager with Morgan Stanley. “The reason is simply because they don’t have the tolerance for the volatility that comes with a 100% equity portfolio.” As an industry, she adds, “the focus should be on advisors helping clients understand the risks associated with different investments and asset classes, and helping them invest appropriately based on their goals.”