There are myriad demands placed on advisers who are responsible for guiding and advising their clients. No two clients are the same, each with their own risk profile and investment time horizon as well as different needs, wants and goals. Advisers also face enormous pressure regarding new regulatory rules, fee compression coming from robo-advisers and handling market volatility. However, there is one commonality: retirement.
No matter the time until retirement, or expected retirement date, all clients need help with investing for retirement. An important part of this is how an adviser promotes good investment behavior — and helps avoid bad investment —to stay on track.
We have all witnessed the impact market declines have had on portfolios, but if you couple that with behavioral studies that show investors hate losses twice as much as they like gains, you have the potential of making a bad situation worse.
It's worth noting that more than 70% of advisers expect the number of their personal retirement clients to grow over the course of the next year, but only 16% of them hold themselves out to be retirement specialists, according to a recent survey from research firm Practical Perspectives.
Voya Investment Management launched its professional development program Retirement University for Advisors earlier this month. In preparation, we asked advisers what would be the most important items that an investment firm could provide to help strengthen and deepen their relationships with their personal retirement and defined contribution clients. The answer was… consistency.
Retirement Life Stages
Consistency means different things to different investors in different circumstances. Throughout the various life stages of retirement, creating consistent investment results is a powerful starting point. It is a mix of investment methodology, setting client expectations correctly and reinforcing positive behavior. So, the question is, how do you find consistency in your investments?
Traditional fund performance analysis offers advisers a fund evaluation that is based on historical static trailing returns, one-year, three-year, five-year and so on. This approach provides a snapshot of performance in time, but can be a poor indicator of future returns. A simple analysis of returns over the last year or five does not tell you whether past success is a result of a fund manager’s skill or mere luck.
QuoteAdvisers have a tremendous amount of responsibilities as the stewards of their clients’ financial goals.
A better way to track fund performance is to use a three-year rolling returns as the basis for analysis. This enables advisers to have more data points to understand whether the manager’s performance was due to skill or luck and removes the near-term bias of more recent returns.
Going a step further, you also need to consider funds based on three life stages of retirement: accumulator, pre-Retiree and retiree. A fund that scores well in a category, say large-cap growth for an aggressive client seeking wealth accumulation, might not be advantageous for a client who is transitioning into retirement or in retirement. So it’s conceivable to have three funds in the same Morningstar category for each of the three life stages. This can have a dramatic impact on an advisers’ business as it allows them to segment their clients and align them with the appropriate fund.
Investing for retirement can be stressful. Uncertainty combined with investor emotions and volatile markets can lead clients to make ill-informed, short-term decisions that can put retirement investing goals at risk. Advisers need to create better retirement outcomes by setting appropriate client expectations by engaging with their clients to foster positive behavioral habits. Advisers need to reframe certain behavioral cues such as: feeling uncertain (that is, regret about past choices or fear of the future); being reactive (making quick decisions without thinking through the consequences); and unrealistic Expectations (selectively ignoring facts and discounts logical explanations.)
As part of our Retirement University, we created a "consistency lens" that uses six, return-based factors to help look for funds that generate above average excess return when compared to the average of the fund universe. The tool also focuses on the volatility of these factors and places emphasis on downside risk.
By doing this, advisers are able to have an honest “apples to apples” comparison among funds in their respective category. This should help alleviate some of the pressures when conducting manager selection and analyzing Morningstar fund categories.