In a post-Madoff, post-Lehman, post-AIG world how have the rules of the road changed for financial services companies?
At this juncture in 2009, no one can know the breadth of change that lies ahead. But the change will likely be significant, nothing less than a tectonic shift. The repercussions will surely be felt for decades.
The world of retirement income will not be immune.
Before the recent market crash, retirement income distribution was viewed as the largest business opportunity in the history of financial services. Even after the massive losses in assets under management, it is still the largest business opportunity facing the insurance and financial industry.
But going forward, the manner in which industry professionals approach the retirement income marketplace may be significantly different than what would have believed or expected only a few short months ago.
At a recent industry meeting, for instance, some financial advisors made clear how deeply they have been shaken by the disastrous performance of the equity markets. This emotional impact was especially evident among advisors who have historically relied upon “accumulation logic” in their clients’ retirement income investing strategies.
For context, remember that growth in financial services has been driven by both a ceaseless focus on hopeful accumulation and consistent promotion of asset allocation and modern portfolio theory.
The boomer generation grew up in an investing culture of asset allocation. It was only natural that financial advisors who have been trained to believe that asset allocation is the cure to all investing challenges would tend to persist with accumulation investing strategies in the context of retirement income planning. Investment companies were generally eager to maintain the status quo.
Tools such as Monte Carlo simulation provided a sense of security around withdrawal rates that seemed reasonable if not conservative (for some, too conservative). Advisors repeatedly stated their comfort in recommending withdrawal rates of 6%, or 8% or more. Of course, no one planned for the level of investment losses that have since occurred. Now, Monte Carlo’s presumed sense of security appears false; that is cold comfort.
Systematic withdrawal plans, target date funds and managed payout funds have failed massively, and the collateral damage to many investors’ future retirement security is likely to be severe if not ruinous. In some cases, even bond funds used in asset allocation models as a hedge against equity losses produced significant losses in 2008.