From the June 2009 issue of Investment Advisor • Subscribe!

June 1, 2009

From the Silver Lining Department

While the market performance of the last 18 months (at least until March 9) has hurt just about every investor and advisor across the board, there are some silver linings from the downturn. Researchers with Financial Research Corp., the Boston-based research firm, suggested in an interview on May 8 that a healthier, more accurate assessment of clients' risk tolerance is more likely moving forward when it comes to retirement income planning.

Bridget Bearden, an FRC research analyst who specializes in retirement, ticked off three major trends in retirement income planning. First, guaranteed products are likely to become a bigger part of retirement income asset allocation, whether through traditional variable annuities or emerging products, because investors' risk tolerances are becoming more conservative, and "they are looking for security and guarantees." Second, Bearden believes there will be a shift in how both advisors and asset managers address risk tolerance. She says that "instead of asking on risk questionnaires 'How would you feel if you lost 15%?' now advisors should ask 'What did you feel when you lost 27%? It's a much different question; it's not hypothetical any more." Not only will this development help guide investment decisions for clients, it will also guide product development. Finally, Bearden suggests that "non-traditional products like ETFs, structured products, and separately managed accounts with riders," will account for a larger percentage of retirees' asset allocations.

Scott DeMonte, FRC's director of variable annuity markets research, concurs, pointing out that traditional products have failed to meet retirement income planning needs: "Withdrawals from mutual funds or taking dividends from stocks or interest off of bonds hasn't worked out well over the past 18 months because everything has imploded, so people are looking at alternative products." That's the reason why there's been a "bump in income annuities and the SMAs with living benefit riders and VAs with living benefits--we're seeing more interest in guarantees than ever before."

What is most appealing about those alternatives? Bearden says "It's the guarantees, the predictable income component, especially the living benefit riders of the SMAs, and the VAs with the new living benefit features." Structured products are more appealing because they produce "predictable income," and she notes that "even closed end funds could come back--they have managed distribution policies. Closed-end funds could also get a "huge boost," she speculates, from the U.S. Treasury's public-private investment program. "They still are perceived as more stable than traditional mutual funds which could have any level of inflows and redemptions that affect the NAV," Bearden points out, while "the products that don't are seen as much more attractive."

(In his column this month, Lewis Schiff discusses additional research by Dennis Gallant and Howard Schneider on how advisors are producing retirement income for clients.)

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