Advisors often use asset allocation and product allocation strategies when setting up financial plans for working adults. But seniors and retirees need to do those things, too, and for the rest of their lives, say senior market specialists.
“Once you explain it, most of them really like it,” says Jordan Gary, founder and head of Investment and Asset Planning, LLC, a registered investment advisory firm in Wichita Falls, Texas. “It gives them more confidence that their money is not going to run out, and they can see how it takes away the risk of living on a financial roller coaster.”
For some seniors, asset allocation and product allocation are new concepts, says Richard Dickens, founder and chief executive officer of Keystone Retirement Solutions, LLC, Columbia, S.C.
However, once people understand, he says, “they see that it fits with their mindset.”
The mindset that most of Dickens retired clients have is “concern for their principal,” he says. This concern escalated after the stock market losses of the early 2000s, he adds, and “now some seniors want to guarantee all of their principal, with no equity exposure at all.”
The strategy Gary uses to address this varies by client age. “Asset allocation using equities is a good concept for younger people, during the accumulation years,” he says. “But as the person ages, the issue becomes, can the person keep on with the same allocation and with monitoring it?”
With age comes increased risk of serious sickness of oneself or ones spouse, he points out. Some people develop memory impairment or sometimes the spouse who kept the financial records dies and the survivor doesnt know where everything is or how to manage it. And sometimes the advisor dies or moves on.
“Ive seen all this,” Dickens says. These life changes cause difficulties for seniors, to the point that he has decided it is generally “best to start simplifying seniors investments as they age.”
Hartford Financial Services Group has been studying consumer understanding of asset allocation. In a survey it conducted with Ibbotson Associates, the Hartford, Conn., firm learned that 8 of 10 investors with household incomes of $75,000 or more believe they are practicing asset allocation. However, the survey also found that the majority actually are doing simple diversification of assets, not true asset allocation.
Further, the survey found those aged 55 and up have less familiarity with asset allocation than younger people (see chart).
[Note: Asset allocation does entail diversification of investments, but this is done in a disciplined manner, with the selection of asset classes related to the persons risk tolerance, time horizon and goals. Most asset allocation strategies also fold in regular rebalancing of assets, to keep the portfolio aligned with the desired strategy, as well as periodic reassessment of the overall plan.]
Many dynamics are involved in helping seniors do asset allocation, comments Charles J. DiVencenzo, vice president and director-advanced product marketing in the investments products division of Hartford Life, a subsidiary of Hartford Financial.
For example, seniors need to understand retirement income and how it may be impacted by longevity, time horizon, withdrawals, lifestyle, health care, Social Security and a myriad of other factors. Efficient taxation and wealth transfer should be addressed, too.
Giving up control over ones assets may be a factor as well, DiVencenzo says, especially among high-income clients in wealth transfer situations. A lot of these individuals are self-made people who dont consider themselves to be old or older, DiVencenzo explains. “So, there may be a long transactional cycle here,” and the advisor may need to solve the more immediate needs first and then gradually move into the other areas.